What happened

Shares of Jumia Technologies (JMIA -2.90%) were tumbling today after the African e-commerce company got attacked by a short-seller. Jumia shares, which had surged since its initial public offering (IPO) a few weeks ago, closed down 18.8% on the news.

So what

Well-known short-seller Citron Research, headed by Andrew Left, called Jumia an "obvious fraud" in a screed of a report published today, saying that it's the worst such scam the company has seen in 18 years.

A motorbike driver delivering a Jumia package.

Image source: Jumia.

Citron claims that Jumia filed to go public because its two largest investors, MTN and Rocket Internet, wanted an exit, and it fudged its numbers in order to win interest from American investors. Citron says it got access to a confidential investor report from October 2018 and that the numbers Jumia presented in its F-1 prospectus in March 2019 are materially different from what it showed to investors last October. In particular, the company inflated its active customers and merchants numbers by 20%-30%, according to Citron. Finally, Citron said that Jumia declined to say in the F-1 that 41% of orders were returned, not delivered, or cancelled in 2018.

Nigerian news sources have also questioned Jumia's fundamentals, according to Citron. 

Now what 

Citron's claims deserve to be taken seriously, but the company has been wrong before. In 2017, the company recommended shorting Shopify, the fast-growing Canadian e-commerce software company, but the stock has doubled since then. Citron came out again last month in a new report against Shopify. 

Some of the short-seller's criticisms of Jumia resemble those of Shopify, as Citron argued that Shopify had its sales force pump up numbers with what essentially amounted to shell accounts. It made a similar claim about Jumia's sales force, Jforce Consultants. Furthermore, growth in active customers or even a high order cancellation rate is not necessarily a sign of fraud.

Expect Jumia to respond to the report, which could reassure investors and help the stock recover some of today's losses.

Whether or not Citron's charges are true, Jumia deserves to be treated with caution. The stock is trading at a price-to-sales ratio of 24, even after today's slide, and is deeply unprofitable with a loss of $195.2 million on revenue of $149.6 million last year.

Considering the stock is still nearly double its $14.50 IPO price, shares could fall further.