Inside Luckin Coffee’s Hungry Rocket Ship Of An F-1

Minutes after raising a fresh $150 million, China-based Luckin Coffee filed to go public in the United States. The firm intends to list on the Nasdaq with the ticker symbol “LK.”

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What Luckin will be worth, and how much money it intends to raise are, at this point, unknown. Initial IPO filings traditionally do not contain more than a placeholder figure for how much may be raised in a debut. Luckin scribbled $100 million in its F-1 filing for its own placeholder.

(Note: an F-1 is basically the same thing as an S-1, except for Foreign-HQ’d companies, hence the “F” prefix. In practical terms, the information disclosed in F-1s is interchangeable with Form F-1s.)

But what we do have is a look at how quickly Luckin is growing, and how much that growth has cost. One thing is clear: Luckin is not going public late; this company is still baking.

Financial Highlights, Lowlights

Lucking Coffee is a high-burn, growth-oriented operation. However, even in the current tech era, where losses in the name of growth are not considered profane, Luckin is spending a lot of money. Let’s examine.

Growth

Luckin had effectively no revenue in 2017. That’s because it was founded in October of that year. Thus, it’s 2018 revenue of $125.3 million is 336,178 percent greater than what the firm recorded in the preceding year.

What we care more about, then, are its quarterly figures. Here are its quarterly revenue figures and sequential growth rates starting in Q1 2018, and concluding Q1 2019, in yuan:

• Q1 2018: 13.0 million yuan
• Q2 2018: 121.5 million yuan (+834.6 percent from Q1)
• Q3 2018: 240.8 million yuan (+98.2 percent from Q2)
• Q4 2018: 465.4 million yuan (+93.3 percent from Q3)
• Q1 2019: 478.5 million yuan (+2.8 percent from Q4)

For reference, the final 478.5 million yuan figure is $71.3 million.

Reading those figure we can see two things. First, that Luckin grew staggeringly quickly in 2018. And that its growth rate went from astronomical to slow on a sequential basis. If a mature SaaS company grew under 3 percent from its preceding quarter it would be in hot water.

So, did Luckin manage to staunch losses when its growth rate fell?

Losses

While Luckin had no essentially no revenue in 2017, it did have costs. They were modest, however, in comparison to its 2018 expenses. Let’s stick to our prior reporting time frame and go over the company’s net losses:1

• Q1 2018: 132.2 million yuan (net loss equal to 1020.7 percent of Q1 2018 revenue)
• Q2 2018: 333.0 million yuan (net loss equal to 274.1 percent of Q2 2018 of revenue)
• Q3 2018: 484.9 million yuan (net loss equal to 201.4 percent of Q3 2018 revenue)
• Q4 2018: 669.0 million yuan (net loss equal to 143.7 percent of Q4 2018 revenue)
• Q1 2019: 558.1 million yuan (net loss equal to 115.3 percent of Q1 2019 revenue)

Yes, Luckin slowed its losses in Q1 2019, the same period that saw its revenue growth slow to near-zero. However, it still lost $88.2 million in the three-month period.

Luckin’s slowing growth rate from the quarter of 2018 to the first quarter of 2019 did not help its net losses enough to bring that figure under 100 percent of its revenue.

Cash Use

Perhaps there is good news for Luckin amidst its cash flow figures? Not really.

In 2018 Luckin Coffee consumed $195.3 million in cash merely to fund its operational deficits. It burned a similar $191.2 million to fund its investing activities. Closer in time to today, the company’s operational cash flow came to -$93.5 million in Q1 2019. In a turn-around, Luckin’s investing cash flow was positive in the first three months of 2019, bringing in $11.4 million.

So What?

What an amazing F-1. I have no idea what this company is worth, how big it will get, or what it’s current health is.

Luckin’s vertical growth in 2018 came with huge losses. No one expected anything different. But how investors will value the company when it’s operating cash flow is so shockingly negative isn’t clear.

And if the company’s growth purchased to-date has been efficient isn’t clear yet. In its F-1 filing, Luckin notes that its customer acquisition cost has fallen from 103.5 yuan to just 16.9 from Q1 2018 to Q1 2019. However, its “new transacting customers” grew throughout 2018 only to fall sequentially from 6.5 million to 4.3 million from Q4 2018 to Q1 2019.

If that is why the firm’s growth collapsed from the fourth quarter of last year to the first quarter of 2019, then we can presume that Luckin may have a customer retention problem. And it was spending so much more before to acquire customers, the impact of a leaky bucket may be severe.

According to the private markets, Luckin is worth just under $3 billion. Let the games begin!