Jumia Technologies (JMIA 8.14%) has been quite a story in 2020 -- even in a year when many e-commerce stocks have generated triple-digit returns. Nigeria-based Jumia's stock is up over 400% in 2020 with just a few weeks to go as digital commerce rises around the globe amid the pandemic.

This particular player still holds a lot of promise -- it's in pole position on the African continent, but is still small, with a market cap just shy of $3 billion as of this writing, with lots of opportunities to move the ball in a new digital era. If the company's recent advance is to continue in 2021, however, I expect these three things will need to happen.

1. A rapid rise in customers

E-commerce really starts to work when the mass-movement of goods gets rolling. But to accomplish that, lots of customers are also necessary. With an African population of well over 1.3 billion, achieving the necessary scale is most certainly possible for Jumia. 

A small grocery cart full of boxes sitting on top of a laptop.

Image source: Getty Images.

There are logistical problems on the continent, but not insurmountable ones. There is a template for success in other emerging market geographies out there, most notably from Alibaba (BABA 0.72%) on mainland China. Granted, Alibaba benefited from a large population united under a single government that has dumped massive amounts of capital into technology development. Jumia doesn't have that working in its favor. Nevertheless, a similarly decentralized geography was overcome by the likes of MercadoLibre (MELI -1.18%) in Latin America, and more recently by Sea Limited (SE 0.76%) in southeast Asia. It took some time, but e-commerce momentum is certainly underway in both of those emerging markets. 

Jumia will need to make progress in adding new active customers in 2021. At the end of September 2020, it had just 6.7 million -- a 23% year-over-year increase, but nevertheless a small number that needs to get much bigger in the years ahead if it's to succeed. But the tools of the trade are in place. The company has transitioned its business to become a third-party marketplace (more on that in a moment), and also has its own digital payments service, JumiaPay, live in eight countries. Such a service has been a key component of MercadoLibre's model that has helped it succeed. 

2. Returning to merchandise value growth

Besides adding customers, Jumia will also need to become more of a platform for daily purchases. In the past, it was a first-party marketplace in which sales of items -- primarily electronics like smartphones -- were made directly by Jumia. As my colleague Jon Quast has pointed out, the company has been transitioning to a third-party marketplace that facilitates sales from retail partners. These third-party sales encompass smaller daily purchases, which means gross merchandise value (GMV) of products sold on Jumia's platform has been in decline in 2020. 

Specifically, GMV declined 18% year over year through the first nine months of 2020. However, the number of orders over that same stretch has increased by nearly 9%. If Jumia is to enjoy similar success as its peers elsewhere, becoming a more frequently used shopping destination will be key. That's where JumiaPay comes in, creating some financial infrastructure in areas with limited traditional banking access to spur Jumia shopping adoption.

As the move to a third-party marketplace (and thus Jumia as a more viable daily-use site) continues, expect to see both the number of customers and the number of orders accelerate in 2021. 

3. Improving profit margins

Then there's the business of profit margins, which admittedly look ugly for Jumia right now. Remember when I said e-commerce works best with mass adoption? Those 6.7 million active customers just aren't going to cut it. Adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) was negative 91.2 million euros (negative $110 million) on revenue of 97.9 million euros ($118 million) through the first nine months of 2020.

There is promise here, though. Jumia's gross margin on merchandise sold was 66% through the first three quarters of 2020. Amazingly, that's far higher than the gross margin earned by far larger MercadoLibre or Sea Limited.

JMIA Gross Profit Margin Chart

Data by YCharts.

Thus, if Jumia can increase activity on its platform and thereby get more efficient on operating costs (versus the gross cost of revenue) like shipping and fulfillment expense, the payoff looks promising. Selling lower-value items (but more of them) will certainly help. To tide itself over, Jumia had 232 million euros ($280 million) in cash and equivalents at the end of September, and it raised another couple hundred million euros through the issuance of new stock at the beginning of December. The fresh cash infusion will come in handy as the company continues to make progress toward break-even.

The takeaway

Jumia Technologies looks like a promising company -- Africa is in the very early innings of adopting e-commerce, and Jumia itself is still very small. It will be a bumpy road ahead, and at 16 times trailing 12-month sales, this is not a cheap stock. But if the company can add more customers, increase transaction frequency, and narrow its losses, it could be a great long-term investment worth owning.