The market does not seem to know what to make of Jumia Technologies (NYSE: JMIA).
Shares of the African e-commerce company debuted last year and jumped, reaching nearly $ 50 per share from an IPO price on the list of $ 14.50. However, stocks fell from there due to a number of concerns, including poor financial results, fraud in sales queues and attacks by retailers.
Shares fell to nearly $ 2 a share in March, but then something surprising happened. Since October, the stock has risen more, reaching more than 500% in the last three months. The primary catalyst for the bullfight seems to be the support of Citron Research, an investment company run by renowned short-term product vendor Andrew Left, who called Jumia a “generational purchase” and said investing partners like Alibaba Group Holding or SoftBank Group was “inevitable.”
Shares have now tripled since mid-November due to large volumes and little news, a sign that short-term traders are pushing stocks higher and that these types of gains can be easily reversed. That’s one reason to avoid stocks, but the bigger one lies in the latest earnings report.
The numbers were ugly
Shares fell after earnings reports in the third quarter, and the results clearly show why. Revenue fell 18% in the quarter from a year earlier to 33.7m euros, although that decline is part of a plan to shift from direct sales to an independent market to sales in an independent market. The strategy makes some sense because functioning as a market allows Yumia to make better use of its technology as it operates in multiple countries, but there are also drawbacks as the company loses control over some aspects of the business, including customer experience.
It is also not experiencing much momentum in the business market. The gross volume of goods (GMV), ie the total value of all goods sold on its platform (both first and third parties), actually fell by 28% compared to last year, to 187 million euros in the quarter. Again, this was part of a diversion strategy from discounts and sales of telephones and electronics (which still accounted for 43% of sales) and towards sales of everyday products.
Jumia managed to reduce the quarterly operating loss from 54.6 million euros to 28 million euros, and the adjusted EBITDA loss from 45.4 million euros to 22.7 million euros.
The trouble lies below
It is also worth noting that e-commerce companies around the world recorded record demand during the pandemic as customers stay at home due to locks and fears of viruses. However, Jumia did not experience such a jump. The company said, “The pandemic has not led to drastic changes in consumer behavior on our platform, nor to a significant acceleration of consumer adoption of e-commerce on a pan-African level.”
It may be more a comment by Africa itself than by the Yumis, but if so, it is one that investors should not ignore. Africa lacks much of the infrastructure that most e-commerce companies rely on. For example, much of the continent lacks street addresses, and many Africans are without bills and rely on cash on delivery. These are huge challenges for a company like Yumia and they will not be easy to overcome.
This could also explain why Jumia is a nearly 10-year-old company operating in countries with a combined population larger than the US and is considered the leading e-commerce company on the continent, but is on track for less than $ 1 billion GMV this year and fights for growth. There is simply no market. Africa is not ready for the wholesale transition to online commerce that most of the world is experiencing.
Theoretically, Jumia has an amazing opportunity ahead of it because the addressed market is potentially large, but it will develop very slowly. It is also a warning sign that the company is already moving from sales growth to profitability. Sure, profitability is a good thing, but most growth stocks are happy to invest in the opportunity ahead of them, realizing it’s better to grab market share while it’s mature and then bring profitability, rather than become profitable in exchange for faster growth. In this case, the focus on profitability seems to be weakness rather than strength.
It’s not impossible that a company like Alibaba could acquire Yumi, but it seems unlikely it would pay more than $ 4 billion for a company trying to wait for $ 1 billion at GMV this year. Alibaba alone has just surpassed $ 1 trillion in annual GMV – more than its market capitalization – and is still growing rapidly with revenue of 30% in the last quarter.
Jumia shares could continue to climb from here as there is no shortage of euphoria in any market today for any growth story, but sooner or later investors will have to face some difficult truths.