When little under-the-radar companies are compared to mega-corporations, it's often little more than unfounded hype. That's how I felt when I first started hearing Jumia Technologies (NYSE:JMIA) referred to as "the Amazon of Africa."
Popular bullish theses rarely praise Jumia on the merits. They typically boil down to the following simplistic idea: Africa is a continent underserved by e-commerce. Amazon is an e-commerce company that's been a great investment. Jumia is an e-commerce company in Africa. Therefore, Jumia will be a great investment.
The truth is, there have been legitimate reasons to not like Jumia in the past. But its most recent quarterly report caught my eye and caused me to reconsider the company. In short, Jumia just made a game-changing move.
The big problem
Jumia Technologies went public in April 2019 as a cash-burning machine. In the first quarter that year, it reported revenue of 31.8 million euros ($38.6 million), for year-over-year growth of just 12%. It also reported an operating loss of 45.5 million euros. It's rare to see a company report an operating loss greater than total revenue, and it speaks volumes to how extreme Jumia's cash burn was.
But it had potential because its gross profit margins weren't terrible. Jumia's gross margin in the first quarter of 2019 was 49%, much improved from the 30% it reported in the comparable quarter of 2018. The biggest drag on earnings was Jumia's general and administrative (G&A) expenses, accounting for 27.8 million euros of its first-quarter operating loss.
If Jumia had robust top-line growth, then perhaps this cash burn could have been ignored by investors. But since going public, revenue growth has been modest and even nonexistent at times.
This was an unsustainable situation, and one that needed to be addressed for Jumia to be a great investment. And address it management did. Last year, it put the company on a path toward profitability that began noticeably paying off in this year's third quarter.
The big pivot
One way to reduce expenses is to pivot from being a retail business toward becoming a retail platform. Put another way, to reduce dependence on generating first-party sales and double down on facilitating third-party sales. And that's exactly what Jumia did.
Jumia makes money primarily from its marketplace business. In the third quarter of 2019, nearly 52% of marketplace sales were first-party sales. In the third quarter of 2020, first-party sales accounted for just 30% of total marketplace sales. To get there, first-party sales plummeted 53% year over year while third-party sales increased almost 19%.
Total third-quarter revenue for Jumia was down 17.7% as a result of declining first-party sales. Most investors just looked at the top-line figure and ran, causing the stock to fall after the third-quarter report. But co-CEO Sacha Poignonnec had something important to share in the earnings call: "For the very first time ever, we reached breakeven before G&A cost at group level."
In summary, Jumia refocused its business to optimize profitability. And as of the third quarter, the company is as close to profitability as it's ever been.
What it could mean
Thinking more broadly, Jumia is shifting from the retail business to the logistics business. I believe this could have many benefits. For example, consider that third-party sales growth in the third quarter means more African businesses are shifting to e-commerce. Success for some could spark interest in others, resulting in a societal shift. What's more, these businesses will have a vested interest in getting their message out there, which could mean Jumia will need to advertise less. Indeed, its sales and advertising expenses were down 55% year over year in the third quarter.
Furthermore, Africa is a market with logistical challenges that need to be solved for e-commerce to thrive. Two big challenges are digital payments and shipping. Jumia has a fintech solution called JumiaPay and a logistics network. And diverting attention away from first-party sales allows for more intense focus on these facets of the business.
Lastly, a logistics business could scale much better than a retail business. For example, Jumia's marketplace is already built. As it onboards more sellers, it can gain operating leverage from selling the same marketplace experience over and over. Contrast that with the variable costs associated with selling products directly.
This game-changing move by Jumia was enough to land it on my watch list. Trading around 18 times trailing sales, the stock still looks expensive given its growth rate. But I don't believe this company can be dismissed any longer. It's worth watching, especially as it executes this game-changing pivot toward profitability.