Have Investors Lost All Reason Investing in This IPO?

Luckin Coffee, a Chinese coffee retailer, went public at $17 per share and raised $517 million (NASDAQ: LK). The company’s stock surged to $25.96 before a steep decline below $18. Between December 31st, 2017 and March 31st, 2019, Luckin Coffee grew from 9 to 2,370 stores, generating a revenue of $125.2 million in 2018. Luckin Coffee posted a net loss of $241.2 million that same year.

If we annualized LK's Q1 revenues of $71.3 million, LK is currently trading at 16.8x 2019 revenues. In comparison, Starbucks (SBUX) currently trades at just 3.7x 2019 projected revenues of $26.2 billion. Quite plainly, LK is not cheap and would need to grow its revenues by 100% each year for the next two years to reach SBUX's price to sales ratio.

Luckin Coffee justifies their high share price with their business model focused on mobile app payments and quick drink delivery compared to Starbucks’s traditional cafe atmosphere. This has lead them to believe they can beat Starbucks.

It's quite possible Luckin Coffee can grow by expanding to new markets as well as take share away from Starbucks. As of the end of the first quarter, LK operated in just 28 Chinese cities, compared to Starbucks's 141 cities. The company still has a lot of room to grow into markets already penetrated by Starbucks. By the end of this year, Luckin plans to surpass Starbucks in locations with 4850 stores compared to SBUX's planned 4200. This is more than a doubling of its 2370 store count at the end of March 2019. Just from an increased footprint, LK could double its revenue run rate by the end of this year.

I personally believe people are investing in Luckin Coffee because they think it could be the “next Starbucks.” This has caused their stock to be overpriced, even if they succeed at revenue growth. Luckin Coffee points to an aggressive customer acquisition strategy for their large losses; however, they seem to be overly focused on revenue growth, rather than making sure they’re profitable.

So, do you think the share price of Luckin Coffee is fair, or have investors lost their common sense? Will they be able to surpass Starbucks in terms of store growth in China?