This week's Industry Focus: Tech is all about Jumia Technologies (NYSE:JMIA), the e-commerce company based in Germany that's sweeping into tons of Africa's most populous and wealthy countries. Host Dylan Lewis and Motley Fool contributor Jason Hall dig into the company's financials, opportunities, and risks, and give investors the most critical facts to know before buying in. Learn more about the demographic trends playing in Jumia's favor, how the company is (and isn't) like MercadoLibre/Amazon/Alibaba/etc., why stock's had crazy volatility in the last few quarters, what to make of Citron Research's short report, how long-term investors can mitigate some of Jumia's riskiness, and more.
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This video was recorded on Aug. 9, 2019.
Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Friday, August 9th, and we're talking about the e-commerce leader of Africa. I'm your host, Dylan Lewis, and I'm joined by fool.com's Jason Hall on Skype. Jason, how's it going, man?
Jason Hall: Great! It's funny, after working together for like six years now, I think this is the first time we've ever done a podcast together.
Lewis: I know! And I'm thrilled, because I've heard such wonderful things from Nick Sciple in the shows that he has done with you. He's spoken so highly about having you on as a guest. Sometimes you have people that don't give it back. Sometimes you're throwing questions out there, you're not getting a whole lot back. That's not the case with you, Jason.
Hall: I like to be engaged! What can I say? I think the reason Nick really likes to have me on there is, he's an Alabama guy, and I'm a Georgia guy, and I think he likes to lord it over me a little bit that his Crimson Tide seems to have my Bulldogs' number. It's nice to not have to take that beating.
Lewis: Well, this is going to be a breeze of a show for you because my college football program was so strong that they disbanded the team my freshman year. [laughs] Northeastern University, Boston. We're a hockey town. We're not really meant to play football over there.
Hall: Not so much. That's one less thing for me to worry about. There we go.
Lewis: The reason I'm having you on, I know you normally talk energy and industrials, Jason. We're talking about a company that maybe has come across the radar of some Fools. I know it's gotten some discussion on MarketFoolery. But it's a business that you follow quite a bit. And it's coming from a part of the world that we generally don't discuss all that often.
Hall: Yes. Jumia Technologies.
Lewis: This is what a lot of people are referring to as the Amazon or MercadoLibre of Africa. It's basically the largest e-commerce player there. They have a lot of elements of their business that are super similar to Mercado and Amazon. I guess we can detail that out. But, e-commerce, logistics, payments, they're starting to follow a blueprint that these businesses have laid out.
Hall: Yep. It's interesting, because if you think about the future of Africa, this is a very young [continent] with a fast-growing urban middle class population. 1.2, 1.3 billion people in the continent. Jumia operates in 14 countries that have a little over half of the continent's population. The company says that those countries represent three-quarters of Africa's GDP, and almost 80% of the continent's internet users are in one of those 14 countries. So, it's really working to establish itself where the consumers in Africa currently are.
Lewis: One of the things that a lot of people that listen to this show and read fool.com articles might not realize is, we are not all here in Alexandria, Virginia or the D.C. Northern Virginia area. We have writers all over the world. We have folks that are looking for stocks all over the world. It was one of those writers who first put this stock on our radar.
Hall: Right. Tyler Crowe, for those of you who have who listened to the Energy and Industrials Thursday show and read a lot of stuff about energy and industrials, Tyler's been a longtime contributor to those segments. He actually lives in Africa. He lived in Malawi for a few years. Malawi is one of the poorest countries in Africa. He now lives in The Gambia. I think I'm pronouncing that correctly.
Lewis: I think so.
Hall: I think I can manage to get that one. He explained that one of the challenges in much of Africa is simply availability of goods. Very limited choices. He described it to me in a conversation as basically, whatever the shopkeeper's cousin in another country could get into the shipping container is what people have access to buy. You think about, here in the States, and in most of the developed world, with e-commerce, we can pretty much buy whatever we want, whenever we want, and we can have it show up at our doorstep within a few days. With Africa's demographics trending really young, and being very internet-savvy and mobile-internet-savvy, and electronic payments starting to be more common and a more comfortable way to buy things, there's a really strong opportunity if Jumia can establish a foothold and build some scale to be a tremendously successful business.
Lewis: Yeah. I have to always take that step back when we talk about e-commerce and remind myself that even in the United States, e-commerce is less than 20% of overall retail. You talk about some of the other developing countries out there, where the logistics aren't as built out, and actually getting those products from online orders to people's houses, it's a little bit tougher. Some of that is because it's less connected. We mentioned that 1.2 billion figure before. I think only about 450 million people in Africa are active internet users. This is a business that enjoys a couple of different major growth levers -- one, the growth of e-commerce; two, this wave of people gaining access to the internet.
Hall: Let me give some context for how small Jumia is right now vs. the size of the potential opportunity today. According to the company's June presentation, the total consumer and business to business spending in Africa is around $4 trillion. If we take three-quarters of that and spread it across the countries that Jumia does business in, that's $3 trillion worth of commerce. That's a tremendous amount of money. Last quarter, there was something like €16 million in business that the company did on its e-commerce platform. €16 million. That's just one quarter, of course. But, compared to around $3 trillion per year, this is just a tiny sliver. This is how early it is in Africa for one of the bigger e-commerce players in the continent.
Lewis: If you look at the books for this business, I think it has a lot of the hallmarks of a high growth, early stage story. They put up €130 million in revenue in 2018. Just as a note, the company is headquartered in Germany and they state their financials in euro. So, unless stated otherwise, all figures that would be dollars are actually euro. The company put up €130 million in revenue in 2018, which is good for 38% growth over the previous year, but huge operating losses. The company lost nearly €170 million on those sales. If you look back at the two years of financials that we have access to, the operating losses were larger than the top line for both years. Jason, what's the story there?
Hall: This is simply a product of how early in this business it is. Losses are going to continue for a time to come as the company builds scale. The bottom line is that the company simply does not have enough merchants using its platform and using its fulfillment services, and enough customers buying those products, to cover its operating costs right now. It's building scale. It's going to continue to have to spend more money than it's going to bring in. And it's going to take time. It's not exactly the same. But if you go back to the early 2000s with Amazon, Amazon was generating around $200 million in negative operating cash per year pretty early in its business, too. You can't draw a direct line from what Amazon was doing in 2009 to Jumia today and say, "Oh, this is going to make me rich," because the risk is that the company's not going to pull it off. But, again, the context is, the company has to build that scale. And it's going to have to burn through a ton of cash to build the scale before the business gets to a point where the cash flows are going to be sustainable to support the existing business.
Lewis: What we've seen so far with businesses that have been successful as the de facto e-commerce or payments provider in a region is that it comes with scale. Unfortunately, you are stuck with a growth story until you can start to realize the benefits of being No. 1 and having some pretty serious leverage on everything that you've built out.
Hall: Exactly. That's why, you look at some of the value traditional valuation metrics, and it trades for, I don't know what it is today, 20X or 30X sales. You think, that's insane. By any traditional valuation metric, 20X or 30X sales is an incredibly overvalued stock. But, again, because of where it is, you have to think about this almost like an early stage biotech that hasn't actually had a drug that's past Phase III clinicals that's available for prescriptions and actually start selling and generating revenue. That's where the company is. It's investing in the business, and building something that's hopefully going to get to scale to be cash flow positive.
Lewis: The key business metrics here are ones that anyone that follows Mercado or Amazon is going to be familiar with. We're primarily looking at revenue, of course, but then also gross merchandise volume, as well as the number of sellers and the number of customers on the platform.
Hall: Right, right. Those are metrics that, within the context of what the company's trying to accomplish, are going to demonstrate, is it growing, is it establishing scale, is all of that money that it's throwing at building out its infrastructure and its platform, is it actually paying off or not? We'll continue to watch that. Obviously, it's a mistake to disregard the cash burn or ignore the losses. The company's balance sheet is really important. You want to continue to monitor its cash position, look at leverage, because it's got to pay for all that. It went public to raise capital to be able to do that. It has a limited amount of capital that we want to see it effectively using, and using that capital to build scale, to move closer and closer to being able to live within its own means, so to speak.
Lewis: To put a couple of figures to that, last quarter, we saw roughly 58% year over year growth in gross merchandise volume. We also saw them come in at about four million active consumers on the platform. You think about that connected number of African citizens, there's a ways to go. That is a drop in the bucket relative to the number of people who have access to the internet in the continent. So, there's a pretty big greenfield ahead of them there.
Hall: Right. Just going from four million to 40 million, 10 times the number of users, 40 million active shoppers, that's still, what, 6%, 7% of the population of the countries that it does business in? Again, you start doing the math, and you start looking at the orders of magnitude that it could grow and still only be a small part, and maybe that can help you see how there's the opportunity for Jumia to really be, again, one of those MercadoLibre or Amazon type of investments, if you look out 10 years from now.
Lewis: Yeah. We've drawn that comparison several times. I think that's a comparison that Jumia welcomes. Even in their own conference calls and investor presentations, they stack themselves right next to MercadoLibre, Amazon, and Alibaba. There's one in particular that I want to home in on, where they have this table breaking down all four of those businesses and their various offerings. So, you have the e-commerce, logistics, payment, fintech, etc. And Jumia plays in a lot of the spaces that these other companies do. But then, you also have Amazon in digital entertainment, marketing and advertising, cloud, same spaces that Alibaba plays in. And I think that beyond where they currently exist, there's a pretty clear roadmap here in different ways that they could monetize this audience and this group once they get to a larger critical mass.
Hall: Yeah. I think it's interesting, because you start talking about getting to that critical mass, and then it opens up optionality, which is something that we definitely like and I'm a big fan of these businesses, that have the ability to go in different ways with their capital, depending on what might necessarily generate the biggest rate of potential return, please the most customers, attract the most customers. That's a really interesting thing to consider.
One business that Jumia doesn't highlight that I think is actually maybe one of the best currents, if you think about scale and size comparisons, and I'm going to murder this name, but it's a Baozun, the Chinese e-commerce platform provider and logistics provider. There's some similarities there, in terms of, it's a little bit smaller, it's still getting started. I think one of the reasons they don't necessarily highlight is that its stock hasn't performed as well as MercadoLibre, Amazon, or Alibaba in recent history. But, you think about it, these are successful businesses. Also, Jumia is the one that's not cash flow positive. All of these other businesses generate positive cash flow and operating profits. Again, it gives you that roadmap, as you've talked about, of the way that this business could potentially evolve if management continues to execute.
Lewis: I think a lot of that stuff will come way down the road. We talk about Amazon's ad business now as this wonderful, high-margin business, it's becoming a threat to Google, it's becoming a threat to Facebook, digital ad spend's going there. Well, we only started reading headlines about this a couple of years ago. And for how old this business is, it was a fairly mature company that then was able to roll this in because they had the captive audience. I'm not expecting Jumia to hop into these spaces anytime soon. But once you're there and you have the built-out marketplace, like you said, optionality galore.
Hall: Right, exactly.
Lewis: Alright, Jason, we could not speak only bullishly about a stock. We've got to temper some of the enthusiasm here. This is a stock in particular, I think, that has had a major hit to it just shortly after going out on the public markets. This is not a company that's been trading for a long time. IPO-ed earlier this year, and pretty much immediately after the public offering, there were people out there questioning some of their books.
Hall: Yeah. If you're a follower of The Fool at all, you're probably familiar with Citron Research, Andrew Left. It seems like a lot of stocks that David Gardner has recommended over the years have been targeted by Mr. Left as for some reason being overvalued. He's wont to bandy around things like fraud pretty regularly in his reports. He came after Jumia a pretty hard really early, like in May. The stock IPO-ed in April, I think. So, within less than two months. Essentially made claims that the company was regularly actively presenting fraudulent numbers with things like orders and gross merchandise volume and merchant figures and that kind of stuff. I've read his reports. I've clicked on the links and looked at the supposed evidence that he's presented. And honestly, I don't see anything that he shows as evidence to support the fraud that he's talked about. I haven't heard a single regulatory agency that's gone after the company or announced any investigations. That doesn't mean that it's not happening. But, there's just nothing there that I've seen to really support it.
He's heavily featured tweets from an African entrepreneur named Rebecca Enonchong. Hopefully I'm pronouncing her last name right. She's had some pretty unfavorable things to say about the company. Some of her tweets are basically saying, "Hey, this research report says that it's a fraud. I agree." She apparently was a property owner and was a landlord for Jumia a few years ago. She's never been involved in the company as anything more than just a landlord. But, honestly, looking at her tweets and reading it, from everything that I've seen, from my perspective, her motivations seem to be more that she's very pro African business, and Jumia is a German company. It was founded by Europeans. It's not headquartered in Africa. Most of its high-level employees, their engineers, they're based in Europe. The employees that they have in Africa are people that work in warehouses and do product delivery and that kind of thing. To paraphrase, what she's said, she doesn't want this to be the media, if the company fails, reporting African e-commerce company fails, but she wants it to be German e-commerce company fails in Africa.
Again, all that to say, I don't think that the risk of it being a fraud is the thing I'm worried about. The bigger risk, and it's a legitimate risk, is that it simply fails to build a successful business in the markets it's targeting and continues to burn through cash without establishing itself.
Lewis: Yeah. I will tack on to that that this will probably be a business that goes through some of the lumps that MercadoLibre goes through, where you are working in several different countries, several different currencies. And as those individual economies get hit or experience growth, you're going to experience issues with the reporting that you do if you're bringing it all back into one central currency -- in their case, euros. I was talking with Danny Vena about MercadoLibre. He's a Fool that's been following that business forever. And he said, the reality is, you just need to expect this company to sell off about 40% once a year. [laughs] It'll also grow considerably, and it's been a great stock to own, but because there are these huge lumps in all these different economies, and you're always bringing money back to one central currency, you're going to have some exchange rate issues with that.
Hall: Yeah. In addition, also, as we've seen with MercadoLibre in Latin America, South America, there's legitimate geopolitical risk, too. Africa has had its share of coups and economic struggles that come out of political strife in many of the countries there. And I think for the most part, the places that it's chosen to do business are relatively stable economies. They're growing pretty well. But, again, these are things that, whether they're reality or just the market's perception, they're going to play a role in how the stock responds over time. I think the key thing is, you have to acknowledge those risks. You have to accept the fact that this is definitely a higher-risk stock on the spectrum simply because it burns more cash than it brings in. It could not stop all of its investing and growing its business and say, "OK, we can be stable now if we just cut our investments," because its businesses aren't big enough at this point. It has to keep spending just to get to a scale to even be sustainable, and it's not at that point. That by definition makes it a high-risk investment.
Lewis: Yeah, as is, it is not a business that you want to own. You want to own the future business. Unfortunately, you have to pay a ticket to the show now if you want to see the show later, right?
Hall: Yeah. I hate the cliché of "It's the cost of doing business," or "It's the price of admission," but it's true. You have to be willing to take on that risk. If you want to own Amazon that's worth $1,800 or $1,900 a share and is a 20,000% gainer for you, you had to buy it in 2002 or 1997 when it was burning more cash than it was bringing in. That's the reality of these. You have to take on that risk if you want to get the upside.
Lewis: One of the reasons I wanted to have you on the show was, you are a Jumia shareholder. I was interested to check in with you on how you feel. In some ways, I'm reminded a little bit of the crazy ascent that iQiyi had shortly after going public, and the sell-off happened immediately after that hype wore off. That's a little bit of what we've seen here. I think the stock doubled, maybe even tripled from IPO price, and we are down now about to where it debuted. How are you feeling as a shareholder?
Hall: About the business, I essentially feel the same way that I did when I first invested. I feel confident that management's doing the right things, they're investing in delivering growth. I do have a regret. The regret that I have is not taking the advice that I'm going to give anybody that's listening on this show. And that's simply that I invested too much, too quickly. I have a pretty sizable position that's down about half because I just bought a ton in the first month or so after IPO, and didn't give the business time to play out before I gradually put in more. With that said, I'm 42, I'm going to be buying more of the stock. I'll probably buy more before the end of the year because I'm regularly putting more money in. But, again, like you said, you're not buying the business today, you're buying the business that it's going to become. Any investor who's got a decade or more to let it run, and can take on the risk that this is the next pets.com -- [laughs] anybody that was around during the .com bust back in the early 2000s remembers pets.com. If you can take on the risk that it is the next pets.com and it's not MercadoLibre -- in other words, take on that risk that you lose however much you put into it -- consider buying. This is where diversification comes in. Tom Engle, who is a longtime friend of The Fool, has said on the message boards a lot of times, this is the kind of stock that, if it works out, you don't need much. If it doesn't, you don't want much. So, start small.
Lewis: I'm curious, Jason -- I have my own tricks for curbing my enthusiasm when it comes to a stock I'm excited about. I tend to buy my positions in thirds or fourths, and I commit to not buying within about a month of each buy. So, I have to pace myself out a little bit. Maybe a little earlier than I want to, sometimes I'll buy that first slug just as a tracking position, just to see what's going on, make sure I'm keeping up with what's going on in the business. And then, over time, I'll add opportunistically after I see some more earnings reports and things like that. Do you have any guidance out there for people that might be interested in doing something similar and avoiding going all in at once?
Hall: I think one good thing to do is, if you really like a company and you've done your initial due diligence and you're ready to invest, start small. Some people buy in thirds. Again, it depends on what stage you are in life. If you're a young investor who's going to be buying new stocks for the next 25 or 30 years, you could be buying every year. This might be a company that you target to do that with. But my general suggestion is, a good way to do it is to take that initial bite, and then wait for one or maybe even two earnings periods to go by, not just to look at the results and the trends and see where it's going, but also to get some idea of what management has to say. Are they starting to change their tune, giving more excuses about the results? Or are they sticking to their guns and saying, "This is what's working, this is where we're going to continue to invest"? You can get a feel for what management is saying, as well as what the company is doing. And then, once you understand the business trends, then you can start looking at the stock price and say, well, I see the business is doing this, and the stock's fallen by half, the thesis still holds and now it's just a better opportunity to buy; OK, now I can buy. So, by focusing on the business first, you force yourself to be a little more disciplined, to follow the business and not the ticker price. And that's a much healthier relationship to have with your stocks. That's my basic thesis for most of my investments -- I focus on the business, and then I look at the stock price. It's just a little bit easier to hang in there if things aren't going well, or to avoid selling a stock that's gone way up just because it's gone up, if you understand the business is just getting started.
Lewis: To sum all that up, you are holding your shares and probably will be buying more over time.
Hall: Yeah, I think I would go from probably to very likely to buy shares before the end of the year.
Lewis: OK. For me, especially now that it's down to IPO price, I am far more interested and it is near the top of my watch list. It's a business that's very interesting. I would like to see some of the fraudulent cloud hanging over it clear up, but I'm willing to have a small position in the company as a tracking position to start.
Hall: I'm going to throw one more thing in there about the fraud and all that kind of thing. The interesting thing is, if you look at short interest, at the peak, less than 10% of shares were held short. At the most recent report, it's like 6.5% of shares. Now, that's still a large amount, but this isn't the 10%, 15%, 20% or more of shares held short that other Citron Research reports have generated. I don't know that the market is completely buying the fraud story. That one might have already answered itself to a certain extent.
Lewis: Alright. We'll see in the coming months. Thanks so much for hopping on today's show, Jason!
Hall: Absolutely! Always fun! Let's do it again sometime!
Lewis: Let's do it again! Listeners, that does it for this episode of Industry Focus. If you have any questions or you want to reach out and say hey, you can shoot us an email at firstname.lastname@example.org, or you can tweet us @MFIndustryFocus. If you're looking for more of our stuff, subscribe on iTunes or check out videos from the podcast on YouTube. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan for all his work behind the glass today! For Jason Hall, I'm Dylan Lewis. Thanks for listening and Fool on!