Shares of Jumia (NYSE:JMIA) have soared over 450% since October after famous short-seller Citron Research reversed its position on the company. Citron, which had previously accused Jumia of falsifying orders, now calls its stock the "largest opportunity in e-commerce," assigning it a price target of $100 per share compared to its current price of about $46 as of this writing. What could be behind Citron's sudden change of heart?
Let's examine the pros and cons of investing in Jumia to see if this Africa-focused e-commerce company is worth adding to your portfolio.
An uncertain macroeconomic environment
Africa presents a big opportunity for e-commerce because of its large population: 1.36 billion people with a median age of just 20. Rising incomes and digital penetration will help expand the growth potential for e-commerce in the region, but these factors are largely out of Jumia's control. A recent military conflict in Ethiopia and persistently sluggish growth in Nigeria and South Africa demonstrate how unpredictable Africa's macroeconomic environment can be.
The good news is that big tech companies are investing in the continent's digital infrastructure. This could indirectly boost Jumia's market opportunity by improving internet speeds and lowering bandwidth costs for consumers.
Facebook is building a 23,000-mile subsea cable to connect Africa with the rest of the world. The social media giant claims that its project, dubbed 2Africa, will triple the continent's cable network capacity and help deliver "much-needed internet capacity, redundancy, and reliability" when it goes live in 2024. Google is undertaking a similar project called Equiano, expected to be complete in 2021.
Statista estimates that Africa's e-commerce market will grow at a modest compound annual growth rate (CAGR) of 13% until 2025. But projects like 2Africa and Equiano could help accelerate the expansion and create a bigger opportunity for Jumia.
Jumia's new strategy will unlock value
Jumia's total revenue is growing slower than the African e-commerce market, with a year-over-year decline of 18% to roughly 34 million euros in the third quarter. Gross merchandise value (the total value of orders on the platform) also fell 28% to 187 million euros. According to co-CEO Sacha Poignonnec, this trend is "largely by choice" as the company winds down its first-party business in favor of its asset-light third-party marketplace, which saw sales grow 19% to make up 69% of total revenue -- up from 48% in the prior-year period.
The new strategy has led to bottom-line improvements. Jumia's operating loss narrowed from 55 million euros to 28 million euros, but management hasn't offered guidance on when to expect full-year profitability.
Jumia's logistics business could also be a source of value for investors. According to Poignonnec, Jumia has created the first end-to-end logistics partner in Africa. The company recently opened its network to third parties to help boost volumes and reduce shipping costs, and it's considering spinning the unit off into a separate entity. Management is also exploring new growth opportunities like gaming and video streaming.
A hold for the time being
Jumia is a great way to bet on e-commerce in the largely untapped African market. And massive investments in Africa's internet infrastructure could help accelerate the opportunity. However, the company also faces challenges that should make investors think twice before stockpiling shares.
It operates in a less stable market and doesn't fully control some of the key variables that will determine its success. Jumia is also still losing money. While these headwinds may be resolved long term, Citron's hyperbolic claims about the stock's near-term potential seem to be more hype than substance right now.