Luckin Coffee stock price analysis: is it a buy as growth continues?

Luckin Coffee (LKNCY) stock price diverged with Starbucks after the two coffee chain giants published mixed earnings. Luckin’s shares plunged by more than 8% in the pre-market session while Starbucks jumped by over 7.55%. 

The coffee industry is still growing even as consumers face numerous challenges because of the elevated interest rates. In the United States, the Federal Reserve left interest rates unchanged at the 22-year high of between 5.25% and 5.50%. 

China, a key market for Starbucks and Luckin Coffee, is going through a strong slowdown as the pandemic recovery stalls. Data published this week showed that the country’s manufacturing PMIs dived in October. 

At the same time, youth unemployment rate has jumped while industrial and fixed asset investments have slowed. The important real estate sector is also collapsing, with companies like Country Garden and Evergrande being on life support.

All these are important for companies like Luckin Coffee and Starbucks, which own thousands of stores in China. In most periods, consumer discretionary spending tends to weaken when an economy is not doing well.

Despite all this, Luckin Coffee did well in the third quarter. Its total net revenue rose by 84.9% to RMB 7.2 billion. This revenue growth came from a low base since the economy was in lockdown in the same last year. Its operating margin rose to 13.4% while the same-store sales rose to 23.1%.

The company opened 2,437 new stores, bringing the total count to 13,273. This is a remarkable growth for a company that was started a few years ago. Also, it has seved over 200 million customers.

It also has a strong balance sheet with over RMB 7 billion in cash and no debt. Its operating cash flow came at over RMB 1.3 billion or $179.6 million in the quarter. Therefore, the Luckin Coffee stock retreated as concerns about the company’s growth emerged. It also dropped after the Chief Strategy Officer announced that he will depart.

Starbucks, on the other hand, announced that its same-store sales in the US rose by 12.5% YoY. Its US revenue rose by 12.5% to $6.9 billion while its international one jumped by 11.4%. 

LKNCY chart by TradingView

I have been quite bullish about Luckin Coffee share price in my past articles. Recently, however, the stock has lost momentum. It has dropped by more than 15% from the highest point this year.

The stock remains above the 100-day Exponential Moving Average (EMA). It remains slightly above the important support at $32.22, the highest point on March 2nd. Therefore, I suspect that the shares will likely continue rising as buyers target the important resistance point at $36.90, the highest point on September 7th.

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