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Luckin Good: Analysts See 'Lots Of Growth' For Starbucks Of China

Investor's Business Daily
2019-06-12 13:59

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Starbucks' (SBUX) Chinese rival Luckin Coffee (LK) got a caffeine boost after Wall Street analysts made upbeat predictions about the coffee shop company as they initiated coverage. But Luckin Coffee stock fell Tuesday in continued volatile post-IPO trading.

KeyBanc Capital Markets analyst Eric Gonzalez gave Luckin Coffee an overweight rating with a price target of 22. He said there is "lots of growth potential," and that it offers high quality, affordability, and convenience in a "no-frills atmosphere."

"Luckin Coffee's rapid ascent toward becoming one of China's largest consumer brands has attracted its fair share of skeptics. However, we believe the company has several strategic advantages that should support its transition into a profitable business," Gonzalez said in a research note. "These include: 1) exposure to a rapidly evolving coffee culture in China; 2) limited direct competition; 3) low development costs; 4) better tech and data analytics than peers; and 5) low per-unit cost structure."

Needham also initiated Luckin Coffee stock with a buy rating, and gave it an even more optimistic target of 27. The firm said Luckin is the only local brand with "strong national exposure" and touted the fact it could offer good coffee at cut-down prices.

"By utilizing its new technology-driven retail model and providing high-quality coffee products, affordability, and convenience to customers, we believe Luckin is disrupting the coffee industry in China," the firm said in a research note, according to CNBC. "Considering the rapid growth of China's coffee market and transition from instant coffee to freshly brewed, Luckin is servicing and gaining market share from an underserved mass market. Its technology and innovative business model allow it to have a lower cost per cup of coffee than other premium brands in China."

Morgan Stanley also initiated coverage, but took a more conservative stance. It has given it an equal-weight rating with a 21 target.

Luckin Coffee Stock Has Caffeine Shakes

Luckin Coffee stock fell 4.6% to 17.60 on the stock market today. The price has been whipsawing since the company made its debut May 17. It remains off its all-time high of 25.96, which it achieved on its first day of trading on the Nasdaq. The stock currently holds a poor IBD Composite Rating of 32.

Luckin Coffee, by one estimate, is China's second largest retail coffee chain by outlets, mostly small booths that fill online orders for pickup, and by cups of coffee sold. The deal had been "double-digit" times oversubscribed, according to IPO Boutique.

However Luckin Coffee has cited higher labor costs as a threat to financials. China's economy is slowing, and state efforts to add momentum or stricter regulations can be tough to predict. The company also warned that it had no liability or disruption insurance. China's insurance industry, it said, is "still at an early stage of development."

The Luckin IPO came in the wake of other wave-making IPOs this year, such as those from ride-sharing services Uber (UBER) and Lyft (LYFT), and photo-sharing site Pinterest (PINS). All three were losing money.

Starbucks Looms Large

Luckin Coffee is the second-largest coffee chain in China by store count. But its biggest rival is among the world's most ubiquitous and deep-pocketed: Starbucks.

Starbucks had 3,789 stores in China as of the end of fiscal Q2, 17% more than it did a year earlier. The company has banked on China to boost sales, scaling up its digital-ordering and delivery capacity to compete.

China same-store sales rose 3% during its fiscal second quarter, up from 1% in the first quarter, Starbucks said in April.

Starbucks stock rose 0.5% to 82.37, just below an all-time high.

Source: Investor's Business Daily 
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