A few months ago, I listed Jumia Technologies (NYSE:JMIA) among my top stocks to buy under $10. Back then, shares traded at around $4.60, which means investors who followed my suggestion would up by almost 600% now.

Do I still think Jumia is a buy today? Well ... maybe. I still believe in the long-term investment thesis, and anyone who owns this stock should know that thesis could take years to play out. That said, the stock's recent run-up has been massive, and the company is facing two near-term challenges that might have short-term investors looking to take some profits soon. Be ready for the stock to pull back until these challenges are resolved.

1. Key African markets are in recession

Jumia's e-commerce marketplace operates in 11 African countries, including Nigeria and South Africa, which are the biggest economies on the continent in terms of nominal GDP. Both countries face severe economic downturns that could limit consumer purchasing power and lower the amount of money people spend on the Jumia platform. 

Fitch Ratings expects South Africa's economy to contract by 7.3% in 2020 because of high government debt and lingering effects of the coronavirus pandemic. The agency also projects a 1% decline in Nigeria as low oil prices bite government revenue. 

A red stock arrow pointing down.

Image source: Getty Images.

While other markets like Ghana, Kenya, and Egypt are expected to grow in 2020, it may not be enough to offset the declines in Jumia's largest markets. Management hasn't provided a breakdown of how much revenue Jumia gets from each specific country, but South Africa and Nigeria represent over 40% of the economic output across all its markets of operation ($799 billion), and that's enough to move the needle. 

2. Third-quarter earnings were a mixed bag

The recessions in Nigeria and South Africa come at a terrible time for Jumia, which is struggling to scale up its business model and deliver profits to investors.

Third-quarter revenue fell 18% to 33.7 million euros as the company winds down its first-party retail business in favor of its "asset-light" third-party marketplace, which grew 19% in the period. And while management dramatically slashed advertising and administration expenses, Jumia still generated an operating loss of 28 million euros -- down from 54.6 million euros this time last year. That's a big improvement, but the company still faces an uncertain pathway to profitability because its top line isn't growing consistently. 

Gross merchandise value (GMV), a measure of the total value of orders on the marketplace, fell 28% to 187.3 million euros as consumers switch from high-value items like phones and electronics to lower-value items like fashion and beauty items and toiletries. This transition is "largely by choice," according to CEO Sacha Poignonnec, who is trying to rebalance Jumia's business strategy in favor of everyday product categories over one-off big-ticket purchases. 

Poignonnec's strategy seems to be boosting margins in the near term -- gross profit after fulfillment jumped from negative 0.2 euros to 1 euro in the third quarter. But the negative trend in GMV could also indicate declining purchasing power in target markets, which would be a red flag for the long-term viability of the company. 

Jumia faces major challenges -- but the thesis is not broken 

Jumia faces significant risks from the economic recessions in Nigeria and South Africa that could limit spending power in its two largest markets. The continued declines in gross merchandise value on its marketplace could also pressure growth, despite decent results in the third quarter.

That said, Africa has great long-term potential in e-commerce as incomes and internet connectivity rise on the continent. Jumia is still a great way to invest in that megatrend because of its early-mover advantage. But long-term investors should be aware that the company is potentially entering a rough patch in terms of business performance, and the stock could face some pressure over the next few quarters.

 

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.