Luckin Coffee (LK) appears to be the target of short investors. The amount of shares short represents close to 8% of the total amount of shares outstanding. The shorts believe that the company should not be trading at more than 4x sales. Even with expected sales growth of 80% in 2021, many investors believe that China is not a place for coffee drinkers.
We do believe that the company’s business model is brilliant, but we accept that 4x sales and more than $30 per share is too much. We don’t see substantial upside. Be sure to understand the company’s financial projections. At this valuation, the share price could be very volatile.
Notice that competitors like Starbucks never traded at more than 4.5x sales. Besides, they usually report an EV/Sales ratio of 2x-3x. With this in mind, Luckin Coffee should be trading at less than $27. We agree with the recommendation given by Morgan Stanley.
Previous Financial Analysis:
Disclosure: We hold no position in LK either long or short, and we have not been compensated for the research.