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Sell Nio Stock, Buy Luckin Coffee Stock

Larry Ramer

Investors looking for a good Chinese growth stock should buy Luckin Coffee (NASDAQ:LK).

Sell Nio Stock, Buy Luckin Coffee Stock

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And anyone who has bought the shares of Chinese electric-vehicle maker Nio (NYSE:NIO) should dump their Nio stock and buy Luckin Coffee stock instead.

Luckin Coffee Stock Is Everything That Nio Stock Is Not

Luckin Coffee stock has all the characteristics of an excellent growth stock. Luckin is growing rapidly, has created a product that millions of people love, isn’t facing tough competition,  can easily grow a lot more and can quickly become profitable.

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Luckin’s revenue jumped from $12.9 million in the first quarter of 2018 to $478.5 million in Q1 of 2019. Clearly, its products are resonating with millions of people in China. According to KeyBanc, the company “provides quality coffee at almost half the prices seen on the menus of Starbucks Corporation (NASDAQ:SBUX) and the British brand Costa Coffee.

Another research firm, Needham, believes Luckin has a huge growth opportunity. The firm wrote that Luckin is  “disrupting the coffee industry in China … and gaining market share in China’s coffee market which is characterized by rapid growth,” Investor’s Business Daily reported. Needham started Luckin Coffee stock with a “buy” rating, while KeyBanc initiated it with an “overweight” rating.

Importantly, Luckin Coffee looks well-positioned to become profitable, especially given its rapid top-line growth. In 2018, the company generated a gross profit of $308.5 million. Although its high total operating expenses of $2.4 billion prevented it from being in the black overall, the impact of the operating expenses — many of which are fixed costs like paying executives and conducting R&D — on its bottom line will decrease as revenue grows.

Conversely, as InvestorPlace columnist Vince Martin pointed out in a piece published earlier this month, Nio is facing very tough competition, and its deliveries plunged nearly 50% in the first quarter versus the previous quarter. NIO itself has warned that its competition is becoming more formidable, even though, as Martin noted, its “market share is miniscule.”

Indeed, the company is competing against at least eight other electric-vehicle makers, including BYD (OTC:BYDDF), which obtained an investment from Warren Buffett, and BAIC, which is owned by the government of China. Additionally, foreign automakers, including Tesla (NASDAQ:TSLA), GM (NYSE:GM), Volkswagen (OTC:VLKAF), and Ford (NYSE:F), are preparing to sell electric vehicles in the Chinese market.

In three of the last four quarterly results reported by Nio, the company’s gross profit has been meaningfully negative, so it’s nowhere near being profitable. Given that stat, along with Nio’s tough competition and the fact that its revenue dropped meaningfully last quarter, I agree with Martin’s warning that Nio stock price could easily hit zero.

Luckin Stock Is a Much Better Buy Than NIO Stock

Despite the tremendous disparity between the companies’ performance and outlook, Luckin Coffee stock is not that much more expensive than Nio stock. Luckin looks much more expensive on the surface because its price is over $18 per share and Nio stock price is barely above $2 per share.  But Luckin Coffee stock has a market cap of $4.14 billion, while the market cap of Nio stock is $2.75 billion. The enterprise value-sales ratio of Luckin Coffee stock is a bit over three, while that of Nio stock is a bit under two. In other words, even though Luckin’s business is so much better positioned than that of Nio’s, Nio stock isn’t much cheaper than Luckin Coffee stock.

The Bottom Line on Luckin Coffee Stock and Nio Stock

Luckin’s business is booming and the company faces very little competition — it will soon be profitable.

Nio’s business is weakening, it faces intense competition,  and it isn’t going to be profitable anytime soon.

Luckin’s outlook is very strong, while NIO has a good chance of going belly-up. And, yet, Luckin Coffee stock isn’t that much more expensive than Nio stock. Clearly, investors looking for a Chinese growth name should dump Nio stock and buy Luckin Coffee stock.

As of this writing, Larry Ramer did not own any of the aforementioned securities.

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