Luckin Coffee stock forms death cross as Starbucks flags China risks

Luckin Coffee (LKNCY) stock price will be on edge on Wednesday as investors read the tea leaves from the latest Starbucks earnings report. Shares of Luckin, the biggest Chinese coffee giant, have plunged by more than 43% from their highest point in 2023.

China economic woes

Luckin Coffee is one of the fastest growing coffee chains in the world. In just a few years, the company has moved from zero stores to over 13,700 in the last quarter and the management expects that this growth will accelerate. It is estimated that stores now stands at more than 14,000.

Luckin Coffee has achieved this by directly investing in stores and by inking franchise deals in the country. As a homegrown company, its demand has been significantly high as evidenced by the most recent financial results.

The data revealed that its revenue jumped by 84% YoY in the third quarter to over RMB 7.2 billion. This growth happened as the company continued to boost its margins, especially in its self-operate stores.

Luckin Coffee share price will be in focus on Wednesday after Starbucks, its biggest competitor in the country, published weak results. Its total revenue rose by just 8% YoY in the quarter to $9.4 billion. Same store sales rose by 5%. However, the company also warned that the Chinese market was going through upheaval. The CEO said:

“We experienced a slower-than-expected recovery in China, driven by a more cautious consumer. While we had a relatively very strong 11/11 holiday, the overall market weakness led to significantly increased pricing competition.”

The statement added that:

“The market is going through a transition as we see an increase in mass market competitors, which we believe will shake out over time.”

These are red flags for Luckin Coffee, a company whose China is its biggest market. This means that Luckin Coffee is also going through these challenges. We will know more about this in March when the company is set to publish its financial results.

It is also worth noting that consumer and business confidence in China is waning as the stock market collapse continues. This trend could see more people avoid discretionary products like coffee.

Luckin Coffee stock price forecast

The plot is thickening for Luckin Coffee share price. On the daily chart above, we see that it has already formed a death cross, which happens when the 50-day and 200-day Exponential Moving Averages (EMA) crossover. This cross happened on January 17th. 

Further, the Relative Strength Index (RSI) and the Stochastic Oscillator have pointed downwards. Therefore, the outlook for the stock is bearish, with the next point to watch being at $17.72, the lowest swing on June 1st last year.