What happened
Shares of Jumia Technologies (JMIA -2.22%) were up 25.4% in December, according to data provided by S&P Global Market Intelligence. The stock was hot throughout 2020, up over 600% for the year, and its momentum carried it higher last month as well. It likely would have gone even higher if Jumia hadn't sold more of its stock on the open market.
So what
The COVID-19 pandemic surprisingly ushered a host of new investors into the stock market in 2020. For proof, consider that popular brokerage app Robinhood added around 3 million new accounts in the first four months of 2020 alone, and has continued its growth since. These new investors were hungry for undervalued, small-cap stocks and Jumia seemingly fit the bill.
Image source: Getty Images.
However, if you look at Jumia's revenue through the first three quarter of 2020, it's actually down 12% from the comparable period of 2019. Granted, some of the decline was by design as it transitions into an e-commerce platform for third-party sales. But a 12% drop in revenue makes a 600% increase in stock price hard to explain. The fact is, many investors like Jumia's potential as the "Amazon of Africa" so much they're willing to overlook lagging business results for the time being.
Jumia appreciates the support it got from investors. On Dec. 3, the company announced it sold nearly 8 million new shares to raise capital. The sale netted the company around $231 million. It's an easy way for Jumia to raise cash and no doubt it will greatly help it grow. However, the stock did dip in the days following the offering.
Now what
Personally, I wouldn't call Jumia an undervalued stock. It's made some important moves in the past year and it's well-positioned in a growing market, but in the end I don't believe the business fundamentals support how much its stock has gone up in December, let alone 2020. That doesn't mean it will necessarily be a bad stock to own going forward. It simply accentuates the company's need to execute on its business plan in the years ahead.
