Should I Buy Luckin Coffee Stock After the IPO?

It's been three weeks since Luckin Coffee Beijing Co. Ltd. (NASDAQ: LK), the second largest coffee chain in China, went public on May 17. The stock opened at $17 per share. Since then, Luckin Coffee's stock price has increased by 11.94% to $19.03.

But investors shouldn't buy Luckin Coffee stock after the IPO. There may be some underlying potential for the stock, but right now, it's best avoided.

Here's why...

Luckin Coffee is a huge chain that has seen massive growth in the 19 months it has been up and running. In 2017, Luckin Coffee consisted of a single store. By 2019, that number had skyrocketed to 2,370 stores in 28 cities. Within the year, the company says it'll have 2,500 more stores.

Because of Luckin Coffee's crazy growth, it's often referred to as the "Starbucks of China."

However, there's a bit more you should know about the young coffee chain.

Luckin Coffee Stock 101

Luckin Coffee is mostly composed of small pickup booths where consumers can either pick up or call in for delivery. However, there are three types of shops in total.

While 91.3% are the pickup booths we talked about above, there are also "delivery kitchens" and "relax shops."

But regardless of location or shop type, consumers typically order Luckin Coffee products through the coffee chain's AI-powered mobile application. And this company has already managed to procure 16.8 million customers during its relatively short run so far.

This rapid expansion caught a lot of investors' attention. So much so that in 2018, Luckin Coffee managed to raise $200 million in private funding. Beyond that, its year-end 2018 revenue was $125.3 million - officially making it the second biggest coffee chain in China.

In the early months of 2019, Luckin Coffee continued to raise $150 million through Series B-plus funding. This caused Luckin Coffee's valuation to rocket up to $2.9 billion in just 18 months.

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Back in April, Luckin Coffee even partnered with Louis Dreyfus Co. and Louis Dreyfus Asia Pte. Ltd. for the construction and operation of a Chinese coffee roasting plant.

With all of the funding, partnerships, and going public, the company is aiming to become the No. 1 coffee company in China. With how little-penetrated the market is, China presents a massive growth opportunity. In fact, the average person there only drinks 6.2 cups of coffee each year. In its neighboring country, Japan, that figure is 279.

But Japan's number wasn't always that high. Back in 1960, Japan imported 15,000 metric tons of coffee. Over the last 60 years, it has increased 3,000% to 500,000 metric tons. Now, the average Japanese person drinks 11 cups per week.

Places like Taiwan and Hong Kong have experienced similar trends as well. In fact, the two countries have reported 209.4 cups and 249.5 cups of coffee a year per person, respectively.

Knowing this, Luckin Coffee is in a prime position for a market expected to skyrocket any time now.

But Luckin Coffee stock has plenty of obstacles ahead with even fiercer competition...

Should You Buy Luckin Coffee Stock?

Even with its rapid growth, Luckin Coffee is up against Starbucks Corp. (NASDAQ: SBUX).

On a global scale, Starbucks has roughly 30,000 locations and has been operating in China for over 20 years. It has over 3,600 shops in 150 Chinese cities. But it also plans to expand to 6,000 stores by 2022.

While Luckin Coffee took plenty of jabs at Starbucks - commenting on inconsistent quality, inconvenience, and high prices - it still has nothing on the coffee giant.

Sure, it made $125.3 million in 2018. It even made $71.3 billion in Q1 2019. But it's far from turning a profit.

In 2018, Luckin Coffee lost $238.1 million. In Q1 2019, it was $78.5 million in the red. It' just a highly unprofitable company and much of this is due to its marketing, business expansion, and a slew of regular discounts.

In spite of this, Luckin Coffee continues to pour money into marketing to push Starbucks out of the spotlight.

And even though Luckin Coffee is poised to outpace Starbucks in its Chinese store numbers by the end of the year, the fact of the matter is that Starbucks can turn a solid profit.

In 2018, Starbucks' revenue was $4.5 billion. Beyond that, the average store produced $794,000 of that revenue each.

In comparison, Luckin Coffee stores have made $148,700 each.

So, while Luckin Coffee is pushing for No. 1, it may just be turning more Chinese consumers into coffee drinkers - boosting Starbucks' success in the long term.

Starbucks shares currently trade for $79.96. But it's forecast to increase 13% to as high as $90 over the next year.

Knowing this, Money Morning cannot recommend investors buy Luckin Coffee stock right now. A better move is to wait half a year or more to see what financials the firm posts. Then make your decision.

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