If Jumia Technologies (NYSE:JMIA) offers anything, it's potential. In the best-case scenario, the startup could become the African version of North America's Amazon.com (NASDAQ:AMZN) or Latin America's Mercadolibre (NASDAQ:MELI) -- two multi-billion-dollar e-commerce giants that have used similar business models to deliver massive returns to investors.

Right now though, around 11 months after Jumia's IPO, the company is still falling far short of its lofty ambitions.

At $2.60 per share, Jumia has shed around 82% of its initial $14.50 IPO price. And with only 234.4 million euros on its balance sheet, the company will have a hard time sustaining its significant cash burn. Losses totaled 63.9 million euros in the fourth quarter, so the company only has a few quarters of operations left at its current spending pace before it runs out of cash.

But while the market has a good reason to be cautious about Jumia, investors may be undervaluing its growing payment platform, JumiaPay. Can Jumia's fast-growing fintech offering save the battered company from what looks like certain doom?

A street scene shows the front of a Jumia warehouse in Morocco.

Image source: Jumia Technologies.

Jumia's stock price is dropping like a rock

Jumia's share price has plummeted more than 60% just in 2020. The company's market cap has fallen from around $500 million at the start of the year to just over $200 million today. But while Jumia has performed poorly in 2020, it's not alone.

The stock's declines are part of a wider market downtrend that has seen the Dow shed about 26% since the start of the year related to the novel coronavirus pandemic and an oil price war.

The disease, which is officially known as COVID-19, originated in China before going on to infect over 130,000 people around the globe. Africa, where Jumia is based, has so far been relatively unaffected by the virus. Nigeria, its biggest market, has only confirmed two cases of deadly infection while Egypt, its second-biggest market, has confirmed 67 cases.

Jumia CEO Sacha Poignonnec guided for some growth disruption due to the coronavirus in the full-year 2020. But macro trends aren't solely to blame for Jumia's poor 2020 performance. Weaker than expected fourth-quarter results released in late February also contributed to the stock's rapid decline. 

Jumia's fourth-quarter results were a mixed bag

Jumia has e-commerce operations in 11 African countries, and JumiaPay is currently available in six of those markets: Nigeria, Egypt, Ivory Coast, Ghana, Morocco, and Kenya. The company's total fourth-quarter revenue grew by 14% year over year from 43.3 million euros to 49.3 million euros. 

Jumia's modest top-line growth was driven by marketplace revenue and first-party sales. Marketplace revenue, which comes from Jumia's third-party seller platform, grew by 50% year over year from 17.3 million euros to 26 million euros. The company's first-party sales (which it undertakes to fill unmet consumer demand on the platform) contracted by 10% year over year from 25.7 million euros to 23 million euros. 

But while Jumia's core e-commerce operations are reporting lackluster growth, its payment processor, JumiaPay, is showing much more promise.

Why does JumiaPay deserve a higher valuation?

On top of being the platform's in-house payment processor, JumiaPay also offers financial services like utility bill payments, airtime recharging, and other third-party financial services.

In the fourth quarter, JumiaPay transactions grew by 110% year over year to reach 2.4 million -- this is 29% of orders on the Jumia platform. The service gained a total payment volume of 45.6 million euros, which is up 57% from the previous year period.

Jumia's fourth-quarter results demonstrate that the company can use its e-commerce platform to drive adoption of its payment processor, JumiaPay. And this could give the company an advantage over privately held competitors who operate in a similar vertical.

Jumia could benefit from VC activity in the African fintech industry

Interswitch, a privately held Nigeria-based payment processor, recently received a $1 billion valuation after Visa purchased a 20% minority stake for $200 million in November 2019. The robust VC activity in the African fintech space could help Jumia earn a similar valuation to Interswitch, if big players see the value in JumiaPay.

Mastercard (NYSE:MA) invested $56 million in Jumia before its IPO -- and JumiaPay was much smaller and unproven at that time. Now that Jumia's shares have become so cheap, a second Mastercard investment could be a catalyst for upside in the stock. 

Jumia's management went to great lengths to prove their value to Mastercard in the fourth quarter.

The company rolled out a program called "Mastercard Tuesday" which gave discounts (as well as raffles and other prizes) to JumiaPay customers who paid using Mastercard at checkout. If JumiaPay can offer Mastercard an edge in the fast-growing African fintech market, it could set the stage for another much-needed multi-million-dollar investment.

Some things to keep in mind

Jumia is in a tough spot. With only 234.4 million euros on its balance sheet and around 63.9 million euros in quarterly losses, the company has a very limited runway. Growth in its core e-commerce business is falling short of expectations, and that's not even considering the potential economic fallout from the growing COVID-19 pandemic.

Despite Jumia's challenges, the company still has potential. Jumia's payment processor JumiaPay is growing at a rapid clip, and this is sure to draw the attention of strategic investors looking to expand into the African fintech sector. Mastercard, one of the startup's early backers, may see the value in JumiaPay and make another investment in the company.

Another Mastercard investment would be a major catalyst for upside in the stock because it would extend the company's runway and give it more time to attain profitability.