Founded in 2012 and based in Berlin, Germany, Jumia Technologies (NYSE: JMIA) is sometimes presented as Amazon from Africa. So when Jumia shares peaked at nearly $70 a year ago, it might still have seemed like a bargain as shareholders envisioned it. Long term returns from the Amazon.
At the start of 2022, after a persistent rout in stock prices, investors must reassess their position. If they liked the stock at $70, shouldn’t they like it at less than $10?
This may not be the right question to ask, however. If the price is what you pay then the value is what you actually get (my apologies for slaughtering a well-worn warren buffet quote), investors should check Jumia’s financial statements and decide for themselves whether the company’s substantial spending will translate into value for loyal shareholders.
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Access a large market
Some investors see Jumia shares as a way to gain exposure to Africa as an emerging economy. It’s a simplistic way to think of Jumia as an investment, because it’s a company, not a continent.
Still, a stake in Jumia as a bet on Africa’s growth can still pay off in the long run. Jumia bills itself as the leading pan-African e-commerce platform, and that’s no empty bluster. Impressively, the company has active operations in 11 African countries encompassing over 600 million people, while accounting for over 70% of Africa’s GDP and nearly 70% of African internet users.
With only 22% internet connectivity, Africa could represent a rare blue sky opportunity in e-commerce in the 2020s. Maybe AlphabetThe planned investment of $1 billion in Africa could facilitate the continent’s transition to full connectivity.
If this plan materializes, Jumia – which controls at least part of the supply chain with its own logistics segment – could monopolize African e-commerce.
Fast growing, faster spending
By some metrics, Jumia’s most recent quarterly statistics paint a picture of an expanding business. In the third quarter, Jumia orders increased by 28%; the total volume of payments increased by 15%; and annual active consumers and gross merchandise volume were both up 8% year over year.
The company also saw an 8.5% increase in revenue over this period, which isn’t great, but not terrible either. When it comes to results, however, there is a potential problem: Jumia suffered an operating loss of $64 million, which nearly doubled from the prior year period.
How did Jumia manage to turn $43 million in Q3 revenue into a loss of $64 million? To invoke a famous i love lucy slogan, the company has some explaining to do. The $22 million “fulfillment fee” may have been necessary to do business (today’s customers want their packages fast, after all), but spending $24 million on “selling fees and advertising” — a huge jump from the $7 million spent in this category last year — is harder to justify.
A superficial victory
Unfortunately, Jumia’s 228% year-over-year increase in sales and ad spend comes with little explanation. It was mentioned that Jumia was looking to “reignite the growth engine through 18 months of reduced marketing spend”, although making up for lost time may not be enough of an excuse for worried shareholders, many of whom are likely in the Red. investment and hope for a pivot to profitability (for the company, and for themselves).
Jumia and its stakeholders got a quick boost when the company released its Black Friday 2021 data, which was not reflected in the Q3 release. For Jumia, Black Friday wasn’t just a one-day event, it spanned a campaign that ran from November 5 to November 30.
For what it’s worth, Jumia had its biggest ever Black Friday campaign last year with gross merchandise value up 30% and orders up 39% year-on-year. These stats may seem like a win, but they’ve done little to stem Jumia’s long-term decline in stock, let alone assuage concerns about the company’s spending habits.
Show, don’t tell
Going forward, while Jumia assures investors that its drastic pace of marketing spending is not a permanent situation, investors should expect to see lower spending in this category. With this, Jumia may be able to move towards a profitable state rather than quickly moving away from it.
Until that happens, results-oriented investors will find it difficult to hold Jumia shares with confidence. Those who are more comfortable with risk, on the other hand, could do well with Jumia in five or 10 years as a bet on the expansion of the Internet in Africa, because the company’s dominance in the commerce ecosystem electronics of the region is undeniable.
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Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. David Moadel has no position in the stocks mentioned. The Motley Fool owns and recommends Alphabet (A shares), Alphabet (C shares), Amazon and Jumia Technologies AG – ADR. The Motley Fool recommends the following options: January 2022 long calls at $1,920 on Amazon and January 2022 short calls at $1,940 on Amazon. The Motley Fool has a disclosure policy.
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