Luckin Coffee stock price: risk-reward favourable as wedge forms

Luckin Coffee stock price has been a strong underperformer this year even as the company implements its turnaround. It has slipped by more than 33% from its highest level this year, meaning that it is in a bear market. In all, the stock has lost ~15% of its value this year while Starbucks has lost less than 1%.

Is this a good turnaround stock?

Luckin Coffee is a fast-growing Chinese company that is seeking to become a major competitor to Starbucks. It has over 9,351 stores in China while Starbucks has more than 6,000 stores in the country. Most of these stores are self-operated while 3,041 are in partnerships.

The most recent results showed that Luckin Coffee served over 29.5 million customers in Q1, a 84% YoY increase. This growth was expected since most of China was in a lockdown in the same period in 2022. Its revenue jumped by 84% to over RMB 4.4 billion.

Luckin Coffee stock continues to underperform because of its accounting scandal that forced it to pay $180 million to the SEC. The company was accused of misstating its revenues and profits in a bid to boost its share price. It did thay by using related parties to create false transactions, which it recorded in its books. As a result, many large investors have decided to avoid the company.

At the same time, there are concerns about tensions between China and the United States. While these tensions have eased recently, many institutional investors have kept off from Chinese companies in the past few months.

Still, I believe that Luckin Coffee has good risk-reward metrics, helped by its strong growth. It can grow to challenge Starbucks both locally and internationally. At the same time, the company could benefit from the falling coffee prices to boost its margins. Coffee prices have dropped by more than 17% from their highest level this year.

Luckin Coffee stock price forecast

Luckin chart by TradingView

The daily chart shows that the Luckin Coffee share price has been in a bearish trend after peaking at $32.28 earlier this year. It is even about to form a death cross, which happens when the 50-day and 200-day moving averages make a crossover.

On a positive side, the stock has found a support at the 50% Fibonacci Retracement level. It has also formed a falling wedge pattern, which is usually a bullish sign. Therefore, I believe that the risk-reward metrics are favourable at this stage. Besides, the stock has even formed a break and retest pattern.