NEW YORK, (Reuters Breakingviews) - Investors who bought into Starbucks’ initial public offering in 1992 had to wait just over two weeks until their shares had increased in value by 50%. On Friday, investors in Chinese rival Luckin Coffee were a whisker away in less than two minutes. Here are two of the many things that are different now: America and China are locked in a trade war, making Luckin a good bet on further skirmishes. Second, IPO investors have seemingly lost their minds.

Luckin is a venti-sized serving of risk. The company didn’t exist two years ago and is unprofitable. It has a convoluted structure, partly because China won’t let foreigners invest in sensitive sectors, which include many internet-based businesses. Its main appeal is that it can run its small stores more cheaply than Starbucks – which is probable – and that Chinese consumers will catch up in their coffee-drinking habits to other countries – which is guesswork. Residents of the People’s Republic drink six cups a year; Americans drink 388. The barriers to entry for selling coffee from small spaces are minimal.

There’s one thing going for Luckin. If China starts to take out its mounting frustrations over U.S. tariffs by targeting American companies who operate in its markets, Starbucks, with nearly 4,000 stores, would be an obvious target. Beyond that, a market valuation of $6 billion – the peak Luckin reached in early trading – is hard to justify. It’s almost 50 times the company’s revenue for last year.

Then again, the market has seldom been so forgiving of money-losing companies without proven staying power. Even ride-share app Uber Technologies, whose debut was arguably a failure in that the shares fell, fetches nearly 9 times trailing revenue. Vegan-burger maker Beyond Meat is valued at around 63 times. Those who just bought into Luckin may have a hedge against a trade war, but are long on irrationality.

CONTEXT NEWS

- Luckin Coffee, a Chinese coffee chain founded in 2017, raised $561 million in its New York initial public offering, as its shares rose almost 50% within minutes of trading on May 17.

- At its IPO price of $17 per American Depositary Share, the company began with a market capitalization of $4 billion. Luckin is not profitable, and made $125 million of revenue in 2018.

(Editing by Jennifer Saba and Amanda Gomez)

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