Traders just won’t give up on Luckin Coffee (OTCMKTS:LKNCY). The one-time apparent Starbucks (NASDAQ:SBUX) of China, Luckin stock lost more than 90% of its value this year following revelations of fraud.
Luckin vastly inflated its reported sales. On the basis of these inaccurate numbers, Luckin sold stock to the public at artificially high prices, thus bringing in a windfall of cash.
The scheme was revealed, the stock crashed, and top management left the company. The Nasdaq stock exchange booted Luckin stock out of its club, and Luckin shares trade on the lowly over-the-counter market now.
Normally, that’d be the end of the line. A fraudulent company collapsed, and shares disappeared. However, the story hasn’t stopped there — at least not yet. Rather, Luckin Coffee has bounced back, as shares have surged in recent weeks.
And there’s a bit of news to support this as well. Before you get too excited, however, consider just how modest the company’s progress has been in recent months.
Regulatory Fines and Luckin Stock
Since September, there have been two events of note that have seemingly driven the rebound in Luckin Coffee. The first of these is that China’s regulator took action against Luckin.
In punishment for the roughly $350 million of fake sales that Luckin reported, China’s regulators fined Luckin and other associated entities $9 million. Those regulators said that Luckin violated competitive rules and also misled the public with doctored data.
While the fine is nominally bad news, in the grand scheme of things, $9 million is not a meaningful blow to Luckin. And by paying a small fee, it seemingly protects Luckin from facing a harsher penalty.
Before you get too excited, however, few traders were talking about Chinese regulators slapping a huge fine on Luckin anyway. So I’m skeptical that this modest penalty really moves the needle in either direction. It’s not like the company dodged a perceived bullet here.
A Board Member Stays
In the wake of the scandal, Luckin greatly shook up its leadership. The company’s chief executive officer (CEO), chief operating officer (COO) and several board members were all fired or voluntarily left the firm.
Against that backdrop, it’s interesting that Sean Shao has rejoined Luckin’s board of directors. Shao headed the inquiry into the company’s auditing after the scandal broke. Given his performance in that role, a key shareholder of Luckin asked for Shao to be reinstated in the company’s leadership team.
Our Will Ashworth has the full details on Shao’s biography and involvement with Luckin. To summarize, Shao is on the board of several other listed Chinese companies, and he also owns some Luckin stock.
Thus, him sticking around — especially after running the independent audit into the accounting scandal — is a plus. However, it’s not clear that this is a game-changer for the firm. There’s still nothing here about getting a renewed listing on a major exchange or finding a realistic path to profitability.
Luckin Stock Verdict
I’ve been more open-minded than most about Luckin Coffee after its accounting scandal came to light. Last month, I made the argument for how Luckin Coffee could mount a comeback. Even despite all the blows to its reputation, the actual underlying business is still operational. And now, the market has woken up to that; Luckin stock is up sharply.
However, with shares hitting $5 once again, the upside is much harder to quantify from here. The stock is up 400% off its lows, and has regained virtually all its losses since it was delisted from the Nasdaq. This has come on very modest fundamental developments. Reappointing one board member is hardly an all-clear for shareholders.
At $2 or even $3 per share, I could make a bullish case for Luckin Coffee stock as a low-priced speculation on a possible comeback. At $5, however, risk/reward has distinctly shifted in an unfavorable direction.
In any case, consider taking some trading shares off the table here. At the end of the day, you’re dealing with a company lacking credibility that no longer trades on a major stock exchange. Risk is elevated here and the share price is no longer particularly cheap either.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.