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Here’s Why Luckin Coffee Stock is a Great Growth Stock to Buy Now

Ever since rapidly growing Chinese coffee retailer Luckin Coffee (NASDAQ:LK) hit the public markets at an IPO price of $17 per share in May 2019, I’ve been pounding on the table, calling LK stock a long-term winner with tremendous upside potential.

Here's Why Luckin Coffee Stock is a Great Growth Stock to Buy Now
Here's Why Luckin Coffee Stock is a Great Growth Stock to Buy Now

Source: Keitma / Shutterstock.com

Today, LK stock trades hands at about $29. That represents a 70%-plus rally from its mid-May IPO price. For comparison purposes, the S&P 500 index is up less than 10% over that same stretch.

In other words, Luckin Coffee stock has been a big winner so far. But, has all the winning been done? Is it too late to buy this strong stock?

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No. Far from it. LK stock will continue to run materially higher over the next several years, powered by robust revenue and profit growth, the likes of which still isn’t fully priced into shares today. Indeed, I think the long-term fundamentals here support LK stock at price tags above $40 in 2020.

Luckin Coffee is a Long-Term Winner

The bull thesis on LK stock is simple, compelling, and won’t get cold anytime soon.

China’s nascent retail coffee market is booming. But, that retail coffee market is still small. The country’s per capita coffee consumption measures around five cups per year. In America, per capita coffee consumption is up around 400 cups per year. In Norway and Sweden, people drink more than 1,000 cups per year. This huge discrepancy implies a huge opportunity for China’s retail coffee market to expand over the next several years.

Luckin Coffee is at the epicenter of this expanding Chinese retail coffee market. They operate small retail coffee shops that are designed for consumers to order their drinks ahead of time on their phones, and simply pick-up their coffee in the store a few minutes later. It’s a unique concept which is attracting a lot of Chinese consumers because it optimizes convenience.

Further, because these stores are doing really well, Luckin is opening a bunch of them. At the start of 2018, Luckin operated less than a dozen coffee shops. Today, they operate nearly 3,700, up 210% year-over-year.

At 3,700 stores, Luckin is far from being done growing. Starbucks (NASDAQ:SBUX) operates more than 15,000 stores in the U.S. That’s about 45 latte-locations for every million people. If Luckin were to match that rate, the company could be looking at more than 60,000 coffee shops in China.

No, Luckin won’t ever operate more than 60,000 stores in China. But, the point here is that robust unit growth will persist for a lot longer. As will its robust transaction-per-store growth. And average ticket size growth. Sustained big growth across all of those verticals will drive sustained big revenue growth. At the same time, margins are steadily improving, and Starbucks operates at 15%-20% operating margins, implying that Luckin has a huge opportunity to go from small and unprofitable today, to huge and profitable in five years.

That transition will ultimately power LK stock well above $30 in the long run.

Luckin Stock can Run Above $40

Luckin Coffee’s long-term profit growth prospects support LK stock at price tags north of $40 in 2020.

The numbers here aren’t too hard to follow. On the revenue side, there are three big drivers.

For one, consider unit growth. Luckin is opening a ton of stores, and will continue to open a ton of stores because they are still small and the untapped addressable market is huge. This company should therefore be supported by 20%-plus unit growth over the next several years.

Second, look at transactions-per-store growth. More and more customers will flock to those stores, because Luckin’s mobile-focused ordering model is designed for the modern, urban consumer. Transactions per store were up more than 50% year-over-year last quarter. This metric should keep growing at a 10%-plus rate.

Third, there’s ticket size growth. The average ticket at Luckin remains very small, at under $2. Last quarter, average ticket increased more than 10%. It will continue to rise at a 10%-plus clip, as Luckin hikes prices and broadens its menu.

Net net, Luckin projects as a 20%-plus unit grower, with 10%-plus transactions per store growth and 10%-plus average ticket growth. Putting all that together, Luckin reasonably projects as a 50%-plus revenue grower. Reasonably speaking, then, Luckin could be looking at $8 to $10 billion in revenues by 2025.

Taking the mid-point and assuming operating margins progress towards industry-average 15-17% levels, then Luckin could produce around $4 in earnings per share by 2025. Based on a market-average 16x forward earnings multiple and a 10% discount rate, that equates to a 2020 price target for LK stock of nearly $44.

Bottom Line on LK Stock

LK stock is a long-term winner that is in the early stages of its multi-year growth narrative. As this story plays out over the next few years, Luckin’s revenue will march significantly higher, margins will improve by a ton, and today’s big losses will turn into big profits.

All of these positive developments will drive Luckin Coffee stock materially higher in the long run. At some point, valuation will become a problem. But, at $30, valuation isn’t a problem yet, so the best thing to do here is remain long and strong.

As of this writing, Luke Lango was long LK. 

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