Shares in Luckin Coffee have fallen 39 percent after its initial public offering (IPO) as investors are worried about the company’s cash-burn strategy.
Starbucks’ rival in China filed for IPO in the United States with a valuation of almost $3 billion since its last funding round.
“Not since the dotcom bubble of 1999-00 has a company achieved a $3 billion public valuation less than two years after its launch,” said Kathleen Smith, a principal at Renaissance Capital, which tracks and invests in IPOs.
Luckin opened for trading on Friday (May 17) at $25 a share, which was higher than its IPO price of $17, and it did well – surging about 50 percent its first day on the Nasdaq. But since then, the stock has plunged 39 percent.
How fast Luckin is expanding has become a worry — especially with trade tensions between the U.S. and China. Luckin has been expanding rapidly, boasting 2,370 locations in 28 different Chinese cities. There are plans to open 2,500 additional stores this year, which means it could dethrone Starbucks as China’s biggest coffee company.
Luckin raised about $561 million from its IPO, and it plans to use that money to fuel expansion throughout China, as well as to fund new stores, customer acquisitions, investments in technology and other corporate uses.
“We have done what most people do in 15 or 20 years,” Luckin CFO Reinout Schakel said.
Another issue: The company has not been profitable since it launched in 2017, and for the first three months of this year, Luckin posted a net loss of $85.3 million.
It has also warned investors that it may be some time before it is out of the red, saying that “we cannot assure you that we will eventually achieve our intended profitability.” Luckin also predicts higher expenses from competition and regulation, as well as plans to boost brand awareness and expand its customer base.