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Another Unprofitable Unicorn IPO Hits The Markets Tomorrow: Luckin Coffee (Lk)

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The IPO

Another unprofitable unicorn IPO is about to hit the markets tomorrow. Luckin Coffee LK, a Chinese based coffee house, is expected to be valued around $4 billion, with shares expected to be priced between $15 and $17.

Luckin Coffee’s claim to fame is it’s completely cashier-less operations. Luckin is being considered a tech company with its application driving the firm’s entire top-line. It allows you to pay on your phone and then pick the coffee up at the closest Luckin location. Luckin also offers a delivery service to your desk that guarantees delivery in 30 minutes or less.

This firm has only been in operation for 19 months, and its sales have exploded since. Luckin can boast a Q1 top-line that has grown 37x from the same quarter last year. Even though this firm is still at an operational loss every quarter, this deficit is continuously shrinking as economies to scale are realized.

Competition

Luckin has become the second largest coffee chain in China behind the infamous Starbucks (SBUX - Free Report) , with 2,370 locations, 90 million cups of coffee sold annually and serving almost 17 million customers. Luckin’s proliferating growth is nipping at the heels of China’s coffee leader, Starbucks, who operates 3,700 stores. Starbucks growth is slowing in China with only 1% growth for Q4 ’18 and Q1 ’19 as well as negative growth in Q3 ’18 for same-store sales. Although they have increased locations by 18% throughout China in Q1.

Luckin’s new tech approach to the traditional coffee houses has grabbed Chinese consumers’ attention and they are continuing to gain & retain customers. I see the competition between these two firms beings heightened in the future but the untapped coffee market in China leaves room for both businesses to continue to grow.

Untapped Chinese Coffee Market

As of now, China is not a coffee drinking country. The Chinese consumed 6.2 cups of coffee per capita annually compared to the United States who drank 388.3 cups per capita, 62.6x more than China. There is a ton of runway for a company like Luckin to flourish in this growing industry. The total addressable market that hasn’t yet been tapped is astronomical. Coffee consumption is expected to more than double in the next 3 years with the consumption of freshly brewed coffee growing even faster.

Luckin’s prolific performance is in a market that is proliferating itself, so I expect as the economies to scale create profitable operations for Luckin, they will have lots of runway to grow.

Luckin Valuation

At its current expected price, Luckin Coffee will have a valuation around 20x price-to-sales with a $4 billion market cap. This company is operating in a scolding hot space and this valuation, although high, may be on point. I wouldn’t jump into LK immediately, wait for the market to fairly price this security then take a position at a valuation you are comfortable with.

Other Recent IPO Performance

Lyft (LYFT - Free Report) and Uber (UBER - Free Report) both continue to disappoint investors. LYFT is down over 30% since its offering and UBER is down almost 10%, with investors being more cautious in this IPO’s pricing. Both of these firms came into their IPO with losses on their income statement. The extremely competitive nature of the ride-hailing industry is leading some investors to believe these firms may never be profitable.

It’s not all bad news for recent unprofitable public offerings. Another unprofitable IPO that hit the market was Beyond Meat , and it had a very different story for investors than the previous two stocks. BYND grew 225% since its initial offering 9 trading days ago, and it continues to grow, up over 2% just today.

Take Away

Every IPO is going to react differently with each of them having their own nuances. Make sure you do your due diligence before jumping into Luckin Coffee (LK) and like I said, wait for the dust to settle before putting on a position unless you are confident in your valuation. I would like to see LK drop its valuation a bit below 20x P/S before I feel comfortable getting in. I may even wait to see how their first quarter as a public company pans out, considering that they have only been operating for 19 months.

 

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