As the Luckin Coffee stock drops, is it safe to buy the dip?

By:
on May 9, 2023
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  • Luckin Coffee shares have dropped by 30% from the year-to-date high.
  • The company is growing rapidly in its core Chinese market.
  • The shares will likely have a bullish breakout in the coming months.

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Luckin Coffee stock has moved sideways recently as the recent bullish momentum faded. The LKNCY shares were trading at $22.54, which was a few points below the year-to-date high of $32.12. Still, in the long term, the shares have soared by over 355% from the lowest level in 2022.

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China’s Starbucks growth continues

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Luckin Coffee is one of the biggest coffee chain restaurants in the world. The company aims to replicate the success of Starbucks in the Chinese market. It is achieving this goal, as evidenced by the most recent financial results.

The results showed that the company’s revenue jumped by 84% from the same quarter in 2022. In the same period, the average number of transacting customers jumped by 84% to 29.5 million. This happened as Starbucks opened 1,137 net new stores to 9,351 stores. Most of these stores are self-operated while over 3,000 of them are operated through partnerships.

Luckin Coffee is also expanding internationally. In the first quarter, the company opened its first two stores in Singapore, a city that is highly popular among the Chinese. I believe that the company will continue growing as China’s economic growth continues. While Starbucks has a good and growing market share in China, the space is large enough for more companies like Starbucks. 

Further, Luckin Coffee has a healthy balance sheet with no material debt and over RMB 4.4 billion in cash and short-term investments. It also has unrestricted cash of over $638 million. Therefore, investing in Luckin Coffee is a bet that the company will continue doing well.

Also, the firm will likely benefit from the trends in the coffee market. Coffee prices have plunged by over 28% from the highest level in 2022. This means that the company will continue growing its margins. The main risks for the company is that many investors are still concerned about its accounting standards and the fact that it is traded over the counter.

Luckin Coffee stock price forecast

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Luckin Coffee stock

Luckin Coffee chart by TradingView

The LKNCY share price has dropped in the past few weeks. In this period, it has formed a descending channel shown in black. This channel resembles a falling wedge pattern, which is usually a bullish sign. On the negative side, the shares have moved below the 25-day and 50-day exponential moving averages (EMA).

Therefore, I suspect that the shares will drop and retest the support at $17.98 (September 2021 high) and then resume the bullish trend. If this happens, the shares will likely retest the year-to-date high of $32.

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