The market doesn't seem to know what to make of Jumia Technologies (NYSE:JMIA).
Shares of the African e-commerce company debuted last year and surged out of the gate, reaching nearly $50 a share from an IPO listing price of $14.50. However, the stock plunged from there on a number of concerns, including weak financial results, fraud in its sales force ranks, and attacks from short-sellers.
The stock fell as low as nearly $2 per share in March, but then something surprising happened. Since October, the stock has rocketed higher, gaining more than 500% in the last three months. The primary catalyst for the surge seems to be a bullish endorsement by Citron Research, the investment firm run by well-known short-seller Andrew Left, who called Jumia a "generational buy" and said that an investment from a partner like Alibaba Group Holding or SoftBank Group was "inevitable."
The stock has now tripled since mid-November on high volume and little news, a sign that short-term traders are pushing the stock higher, and those types of gains can be easily undone. That's one reason to avoid the stock, but a bigger one lies within the latest earnings report.
The numbers were plain ugly
The stock plunged after its third-quarter earnings report, and the results make it clear why. Revenue fell 18% year over year in the quarter to 33.7 million euros, though that decline is part of a plan to shift from first-party direct sales to third-party marketplace sales. The strategy makes some sense as operating as a marketplace allows Jumia to better leverage its technology as it operates in multiple countries, but there are also drawbacks as the company loses control over some aspects of the business, including the customer experience.
It's also not experiencing much momentum in the marketplace business. Gross merchandise volume (GMV), or the total value of all the goods sold on its platform (both first-party and third-party), actually dropped by 28% year over year to 187 million euros in the quarter. Again, that was part of a strategy to shift away from discounts and selling phones and electronics (which still made up 43% of sales) and toward selling everyday products.
Jumia did succeed in trimming its quarterly operating loss from 54.6 million euros to 28 million euros, and its adjusted EBITDA loss from 45.4 million euros to 22.7 million euros.
Trouble lies beneath
It's worth noting also that e-commerce companies around the world have seen record demand during the pandemic as shoppers stay home due to lockdowns and fears of the virus. Jumia, however, experienced no such spike. The company said, "The pandemic did not lead to any drastic changes in consumer behavior on our platform nor meaningful acceleration in consumer adoption of e-commerce at a pan-African level."
That may be more of a commentary on Africa itself, rather than Jumia, but if so, it's one that investors shouldn't ignore. Africa lacks much of the infrastructure that most e-commerce companies rely on. Much of the continent lacks street addresses, for example, and many Africans are unbanked, relying instead on cash on delivery. Those are enormous challenges for a company like Jumia and won't easily be overcome.
That may also explain why Jumia is a nearly 10-year-old company operating in countries with a combined population greater than the U.S. and is considered the continent's leading e-commerce company, but is on track for less than $1 billion in GMV this year and is struggling to grow. The market simply isn't there. Africa isn't ready for a wholesale transition to online commerce like much of the world is experiencing.
Theoretically, Jumia has an amazing opportunity in front of it as the addressable market is potentially huge, but it will be very slow to unfold. It's also a warning sign that the company is already shifting from sales growth to profitability. Of course, profitability is a good thing, but most growth stocks are happy to invest in the opportunity in front of them, understanding that it's better to grab market share while it's ripe and then deliver profitability, rather than becoming profitable in exchange for faster growth. In this case, the focus on profitability therefore seems to be a weakness rather than a strength.
It's not impossible that a company like Alibaba could acquire Jumia, but it seems unlikely that it would pay more than $4 billion for a company trying to scratch out $1 billion in GMV this year. Alibaba itself just topped $1 trillion in annual GMV -- more than its market cap -- and is still growing fast with revenue up 30% in its most recent quarter.
Jumia shares could continue to climb from here as there's no shortage of euphoria for any kind of growth story in today's market, but sooner or later investors will have to face some hard truths.