What happened

Shares of Jumia Technologies (NYSE:JMIA) were up 5% at 2:54 p.m. EDT on Thursday, having lost a little momentum after spending most of the morning up by double digits. Today's rally comes after yesterday's brutal sell-off, when shares closed down more than 20% following the company's second-quarter earnings release. 

So what

Jumia, the e-commerce start-up looking to become the first mover in Africa's biggest markets, reported second-quarter earnings that fell well short of many investors' expectations. The company had a 10% revenue decline, surprising many people who expected every e-commerce company to be reporting big growth. 

Smiling man opening package.

Image source: Getty Images.

That's doubly true for Jumia, which is viewed as a leader in the markets it operates in, with a last-mile distribution network to fulfill orders. 

To wit, analysts are starting to look favorably on Jumia for its scale and first-mover advantage, raising price targets for the stock as the company leverages that infrastructure and focuses on its role as a marketplace, not a seller. 

Now what

Wall Street analysts actually expected Jumia's revenue to fall, as it shifts its business model away from being a seller and onto being a marketplace for other merchants. Analysts were looking for revenue to fall closer to 20%, so the decline of "only" 10% was actually better than expected. 

Moreover, Jumia reported some positive metrics based on the shift in the business model. While direct revenue fell sharply, third-party marketplace revenue was up 38%, and orders increased 8% in the quarter, and the active customer count increased 40% year over year. Jumia's digital payments platform, JumiaPay, also showed strong growth, with payment volume up 106%. 

Now to the downside: Jumia continues to consume cash, reporting an operating loss of 37.6 million euros ($44.2 million). That's a 44% smaller operating loss than last year, but the company is still burning cash at a rate that investors need to watch closely. The reality is, Africa is still very early in the retail transition to e-commerce, and there's opportunity but also very real risk. 

At the six-month burn rate, Jumia has about a year's worth of working capital; but at last quarter's rate, things look much better, and that gives Jumia a bigger margin of safety to build the scale it will take to generate positive cash flow. But as long as it's a cash-flow business, there's significant risk that investors could experience a permanent loss of capital. Invest according to your ability to absorb those potential losses. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.