Luckin Coffee Broke a Sacred Trust with Investors

It will be nearly impossible for Luckin stock to play the scandal down

By now, you’ve heard just about every angle there is to cover regarding the accounting scandal that has plagued Chinese barista upstart Luckin Coffee (OTCMKTS:LKNCY). Once billed as a competitor to some of America’s top producers of joe, Luckin stock is now associated with some of the ugliest corporate scandals. Given the disgusting lengths management underwent to fabricate $310 million worth of sales, LKNCY is a name to avoid.

Still, the weird vibes of the new normal appears to have provided Luckin stock with a lifeline. For one thing, it’s still trading. Clearly, people haven’t completely given up on the compromised growth narrative. Perhaps more importantly, LKNCY appeals to the new breed of speculators.

After all, millions of people have been stuck at home, turning to the markets for both entertainment and a chance at profitability. Strictly on paper, Luckin stock appeals to our base thinking. With a current price a little above $2, this represents a 90% discount from the $20 level where shares traded at shortly after its initial public offering.

To be fair, it’s not just wild speculation that’s driving Luckin stock. Fundamentally, some of the arguments make sense. First, total coffee consumption has increased significantly in China since the middle of last decade. Second, this consumption is mostly attractive to two key demographics: those aged 26 to 35 years and 19 to 25 years.

Obviously, if you believe in the comeback story of Luckin stock, the demographics appeal to you. Not only do young people drive the prevailing consumer culture but they’re at prime family bearing age. It’s possible, then, that coffee consumption could enjoy a long upside pathway.

That’s all true. But here’s the thing: Luckin lied.

Unfortunately for Luckin Stock, Deceit Is Not Quickly Forgotten

Indeed, you can write a dissertation about the groundbreaking potential of coffee culture in China. You’re not going to find me disagreeing as multiple reports confirm the enthusiasm. However, this isn’t about coffee as a burgeoning industry in a viable market. Instead, it’s about accounting fraud.

As you know, counterfeiting U.S. currency is a federal crime, potentially punishable by decades behind bars. At one point, China punished counterfeiting currency with the death penalty. Some might argue that this is a victimless crime. On the contrary, nations take this issue seriously because such fraud undermines the trust that drives all commerce.

And that’s the first, last and middle points regarding Luckin stock. You cannot do business with an organization that cooks its books. Frankly, I’m surprised that some folks are seemingly okay with the crime.

You don’t have to take my word for it. Instead, consider the many accounting scandals that have rocked the international investment community. Some of the biggest fraud cases involve elements with which we’re now all too familiar: companies padding their numbers with fake metrics to please shareholders.

In the end, the original organizations either go defunct or are bought out by competitors. What you don’t often read about are the many personal stories whose careers have been ruined because of negative associations. Imagine trying to hawk your resume to companies when your core experience revolves around a discredited and shamed firm.

I know many such accounts and they’re all heartbreaking. Of course, this makes me all the more furious at what Luckin did.

Really, there’s no justification. If the growth story was really that great, Luckin wouldn’t have had to lie. It’s that simple.

Avoid That Tempting Itch

Still, we’re all humans. When I look at the pop that occurred in LKNCY in late August, I know what many speculators are thinking. In just a few days, shares gained 47%. So long as I get in at the right price, I can be a recipient of the next bullish wave.

Admittedly, this is a real possibility. However, it’s also possible that Luckin stock could collapse from here. Keep in mind that we’re in a tight political race which has strong geopolitical implications. Depending on how the presidential election turns out, speculative Chinese companies could end up losing badly. And that’s not even mentioning knowingly compromised firms.

If you value real growth potential, you don’t want to waste your time with LKNCY unless you’re going for pure speculation. There are several viable opportunities, ranging from high-risk, high-reward ventures to well-established names, available to you. Better yet, these companies are conducting business the right way.

On the date of publication, the InvestorPlace staff writer responsible for this article did not have (either directly or indirectly) any positions in the securities mentioned in this article.