Is Luckin Coffee a good investment after a 80% fall yesterday?

Luckin Coffee (NASDAQ:LK) is a Chinese coffee house chain that formed in 2017. The company has a $1.75 Billion market cap, making it one of the biggest Coffee Corporations in China. The company was trading around the $30 mark (NASDAQ) through February with investors confident that the Chinese giant would survive. It wasn’t until news broke that the Luckin Coffee Chief Operating Officer (COO) was accused of fabricating 2019 sales that investors began to flee. It is alleged that the COO had fabricated an estimated $310m in sales through the second half of 2019 according to NIKKEI Asian Review.

Who saw this coming?

It was reported on a CNBC interview that Jim Chanos, Founder of Kynikos Associates had bet against this company. He explained many US investors are getting burnt by these offshore fast growth companies that use questionable business models. Another research team Muddy Waters shorted Luckin Coffee after reviewing an “89 page report” on fraudulent activity with inflated results in January.

What this means for investors?

The Luckin Coffee market cap shrunk by $5 billion overnight as investors fled to the exit door to salvage their losses. A remarkable 80% drop is a feat many companies never experience over their business lifetime. Now you’ll be asking, now priced at $6.40 is this the perfect time to buy? Well it’s a lot more complicated than you may think. Now besides the legal disaster this leaves the corporation, the investor confidence in this company will remain skeptic for a long time. We saw the same story when AMP, a major Australian investment bank lost all investor confidence after senior management lead a huge fee scandal. The point is that Luckin Coffee are unlikely bounce back in the next few weeks due to the uncertain fate of the company. With large corporations especially poorly regulated companies outside of the US. It will take a long time for Luckin Coffee to build trust between shareholders.

Legal issues remain the question

Now according to legal sources, American shareholders are filing a lawsuit against Luckin Coffee. The case is on the grounds of leading shareholders that bought equity between November 13, 2019 and January 31, 2020. However investors had some idea in January about the accusations of fabrication. Therefore investors may not be protected over the recent plummet. Read more about the lawsuit here. Now a $310 million fabrication is a big deal and as many investors base their decisions on revenue results. It was a very unprofessional and unethical decision by LK senior management. We are looking at a very long investigation into misconduct. Which is not good news for current Luckin shareholders.

Is it worth it’s current price?

Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.Now like I say with any relatively underpriced stock, there is always a good reason as to why it’s underpriced. There is going to be long term legal repercussions for Luckin Coffee and these charges will effect investor transparency. Therefore effecting the share price. If the company survives the investigation, we could be looking at 2-3 years of profit diverted to paying off the lawsuit. Personally unless the company falls to $3-4 (low entry). I don’t see it being a viable investment regarding the risks involved. It remains a grey area whether offshore companies should be audited more strictly so they aren’t putting US investors at risk.

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