Earnings Roundup: Olo, Jumia, and Lemonade

In this episode of Industry Focus: Tech, host Dylan Lewis and Motley Fool contributor Brian Feroldi run through earnings updates from three companies on Dylan's watch list -- restaurant tech company Olo (OLO -1.12%), "Amazon of Africa" Jumia (JMIA -2.22%), and "finsurance" player Lemonade (LMND -0.06%).

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This video was recorded on May 14, 2021.

Dylan Lewis: It's Friday, May 14, and we're talking three Fool favorites that just reported earnings. I'm host Dylan Lewis. I'm joined by fool.com's ill-advised indexer of incomplete information, Brian Feroldi. Brian, how are you doing?

Brian Feroldi: I'm doing better than my portfolio is doing, Dylan. How are you doing?

Lewis: Yeah, I know how that feeling. It's been a little bit of a rough week if you're a little bit more growth minded.

Feroldi: It's been a rough couple of weeks or even couple of months if you are growth minded. If you were a buyer say in February, the last few months have been brutal. If you have cash on the sidelines and are interested in growth, the last few months have been great.

Lewis: We talk about it all the time, but it's nice to have some cash on the sidelines so that those days where you're seeing a lot of red in your portfolio feel a lot more like opportunities than they do lost money. I haven't done any buying immediately, in part because I wanted to make sure I was clear to talk about a couple of companies on today's show. But I have some cash on the side and I'm planning on putting it to use over the next couple of weeks. Looking like there are some pretty attractive buying opportunities out there, especially because a lot of those companies, Brian, were on my list anyways. They were companies at higher valuations that I was already interested in.

Feroldi: Spoiled for choice, we did a show on Motley Fool Live earlier this week, where we had to talk about a stock that we own that was down 25%, I had a few dozen choices to choose from, Dylan.

Lewis: That's right, over the long term you don't feel those things quite as much. But short term, man do they bite, and that's where the people that bought a lot of these high growth businesses in early 2020, maybe mid-2020 are probably sitting on some pretty great returns. If your cost basis is tied to selling a little bit closer, maybe the last three or so months, certainly for a lot of more high growth oriented stocks, you might be feeling a little bit more pain.

Feroldi: One of my favorite tricks to do whenever I'm feeling short term bad about myself is just zoom out. The longer I zoom out of my portfolio, the better I feel.

Lewis: People know that we're not just talking about things hypothetically here. The first business we are going to be talking about and doing earnings on is a company I own, it's Olo. We've talked about it on the show before, Brian and I did prospectus break down when it first came available. I'm currently in the red on this investment. No bones about it, it is one of those businesses where I'm usually not someone who's buying shares of the business immediately after an IPO, saw a lot of things that I liked with this company though, decided just to get a small tracking position and wanted to see more results come in. We finally have our first glimpse at their results as a publicly traded company. First earnings report came out earlier this week, Brian, what did you see?

Feroldi: Well, let's back up and talk a little bit about Olo, because that is not a company that I am sure many people are familiar with. To your point, this is a show we did a deep dive on when their S-1 came out on Friday, February 26th. We went through and we said, Wow, tons to like about this business. They did come public on March 19th at $25 per share and they raised just under $500 million. Now, the name Olo, is a shorthand for online ordering and this company helps restaurants to take customer demand online. They were actually founded in 2005, first got started by helping restaurants take orders via text message. Over time, they have slowly evolved to build out a software as a service product that is enterprise grade. They have done a fabulous job at getting the who's who in the restaurant industry on board. As of the most recent quarterly report this company had 400 big name restaurant brands on their platform including: Five Guys, Shake Shack, Chili's, Wingstop, Applebee's, Cheesecake Factory and more, so that is a cusp of what they do and who they are.

Lewis: Yeah, and I think even in that rundown, our listeners can probably start pulling out the core elements of the thesis with a company like this, right? SaaS provider, recurring revenue and the major tailwind here is restaurants brick and mortar going digital in creating good opportunities for, in this case with Olo, restaurants to own a little bit more of that experience than be so reliant on some of the third party logistics apps that they've become in some ways beholden to.

Feroldi: Again, if you are a restaurant train you want to own the customer experience. Yes, it's nice to get an order from a GrubHub or DoorDash or an Uber Eats. But then those platforms own the customer, you are just the delivery platform. Olo allows those big chains to own the customer experience, so that they can use their own app or their own website to place the order and do the delivery. Importantly, Olo partners with many of those delivery services so that the companies can still have their orders delivered, but they keep the customer experience in-house. That's an important distinction.

Lewis: For people that have been following the delivery trends, the DoorDashes, the Uber Eats of the world, they know that the pandemic has been an incredibly high growth period for these businesses. They have really come front and center. There have been some issues that have come along with that, but this has been a booming business period for companies in this space. That's really what we see when we look at these first earnings reports from this business.

Feroldi: Yes, the first earnings report is a critical one in my opinion it is basically the company's coming out party. It sets the tone for what investors can expect out of this company. On that front, man is there a lot to like here. So the number of locations that Olo has under its platform grew 42% to 69,000. Average revenue per unit grew 61% to 525 and the dollar based net revenue retention rate remained at over 120%. You mix those together and you get some fabulous results in the income statement. Our revenue grew 125% to $36 million. Non-GAAP gross profit increased 151%, so gross margin here increased to 83%. Net loss on a GAAP basis exploded to $26 million. But on a non-GAAP basis, the company remains net income positive and they generated $6 million in net income. Free cash flow was $4 million, and thanks to their IPO, they now have over $580 million in cash on their books, the numbers were great.

Lewis: These are fantastic figures and people might be surprised to hear where they are on a GAAP, non-GAAP basis on the bottom line. This, I think, is probably going to be a business in general that ebbs and flows with small levels of profitability and small losses here and there. Certainly not in a period where they're trying to be profitable, you hear that growth rate you know they are heavily in investment mode. But it is a little bit different than some of the other businesses that we tend to see coming public. Because Brian, this isn't a company that's hemorrhaging money in the way that a lot of other really high growth tech businesses are.

Feroldi: Yeah, not at all. Again, that's why I always like to talk about free cash flow. Because again, while they reported a $26 million net loss their bank accounts grew by $4 million during the quarter not including the proceeds from the IPO, so that's an important distinction. Now importantly, those are just the financial headlines. The company actually had a number of operational headlines that are worth noting out. The most notable one was they convinced Bloomin Brands, which is the parent company behind restaurants like Outback and Carrabba's to change 100% to Olo from their own home built system. That's a major customer win that this company scored in the quarter. They also expanded relationships with brands like Covers and Nandos. Nandos is actually Canadian company, so that shows that Olo's concept does cross borders. They expanded their relationship with Union Square Hospitality Group, which is the number of companies that are owned by Danny Meyer the famous restaurateur. 

As a reminder, Danny Meyer is on this company's board. That's one thing that we pointed out in the S-1 show that we really liked. The important thing there is Danny Meyers companies are really fine dining establishments, which you wouldn't really put together with takeout ordering or our online ordering, so that really shows that this platform works for both quick serve and at the high end.

Lewis: Yeah, and we talked about it a lot. It's worth emphasizing I think with a company like this though, when you hear there's a compelling investment thesis. It's a software space that maybe you don't interact with normally as a user. This is behind the scenes, we don't really know we're interacting with it. You want to see the customer list growing and you want to see brands that have a pretty big footprint, a really established use case deciding to use a provider. We have that all over the board with businesses here, you could put up a ton of different logos and it would cover the screen. I mean, this is a lot of social proof that what they're offering is a compelling idea to restaurants.

Feroldi: That's a really important point, especially some tech that's really hard to understand to follow the customers. Where are the actual customers and the experts in this space voting? Clearly, clearly, the big name enterprise restaurant companies are choosing Olo as the platform of choice, that's a major sign. A couple other things to note during the quarter that were definitely interesting, the company did win over a Goop kitchen and Guy Fieri's Flavortown Kitchen; those are virtual restaurant brands, A.K.A. ghost kitchens. Olo seems like a natural fit into that market. That's going to be a growing market overtime, so it's good to see the Olo is already establishing itself there. Another big and important announcement was that they reaffirmed their partnerships with both DoorDash and Uber Eats. They had an ongoing dispute with DoorDash that was completely settled during the quarter. These companies need each other that's very clear, so it's good to see that they get behind them. Then finally they joined the 1% pledge. The 1% pledge was started by Marc Benioff at Salesforce.com, where they basically take 1% of their employees time, 1% of their equity, and they give it away to charitable causes, that's a nice feel good moment. So Olo really, really got it done in the first quarter.

Lewis: Yeah. There's a lot to like in this report and I'm happy to see it as a shareholder, because companies choose when they go public and you see a really nice growth story. You see a lot of tailwinds and it is possible sometimes the company decides management decides, you know what, this is the right time, because a lot of these metrics that look really impressive might be turning south or they might slow down a little bit in their growth story, not the case here right now.

Lewis: I'm pretty happy as a shareholder with what I've seen. It is interesting though, Brian. We talked about that topline growth figure, over 100% growth. They were put on the 11th,the stock's down about 20% since then. There are a couple of things going on. We talked about some of the pain that has been seen with gross stocks in general. But I do think it's worth talking a little bit about what the company guided for and what investors should expect going forward. Because you hear that triple-digit growth number and you get really excited. Unfortunately, I don't think that's sticking around based on what we got from management. For the second quarter, management is expecting revenue of around $34 million, operating income, on a non-GAAP basis, to be a little over $2 million. For revenue, that's about 40% year-over-year growth. That's where it's really important to understand where the major step change in growth was and then revenue was for a lot of these COVID businesses. Basically going from Q1 to Q2 of 2020, they grew their topline 50% sequentially, which is absolute bonkers. You don't see a lot of companies pull off anything close to that. They are running into much tougher comps for the rest of the year and really going forward for the rest of their time in this business. That means that that growth rate that we're so excited about now is going to come down. I think a lot of people are still pretty happy about 40% growth given the gross margin this company has though.

Feroldi: Yeah, no doubt. One thing that we did call out when we did our S-1 show is, you could probably expect this company's topline to be a little bit lumpy. It is targeting enterprise grade restaurants and winning one of them can result in a massive bump in revenue. If they have a slow quarter on the sales front, that can result in tougher year-over-year comparisons. This is a company you're probably going to have to be more focused on judging on a year-over-year basis for the full-year as opposed to what it did versus the prior quarter. That's especially true when given the things you just said that were the quarters compared to a year ago where COVID just getting started and COVID really in full force. When I see a company calling for 40% growth for the full year, that's roughly what its growth rate was prior to this or maybe a little bit slower, but man, you can't complain about that.

Lewis: No. It's pretty impressive. For full-year to be $142 million roughly, that's pretty strong, puts them at 40% year-over-year growth. The party is not going to be indefinite. That growth rate will come down as the numbers get bigger over time and we're starting to see that. But you look at this business on a trailing basis, 28 time sales, Brian, that's pretty solid. I think for the market environment we're in right now, not bad and about the same, a little bit less on a forward basis when you look at that full-year. Given the margin profile, given the tailwinds behind this business and how early on they are in the growth story, and I think the total addressable market, I'm very happy as a shareholder again, with this report.

Feroldi: Yes. One other thing we didn't call out, but I think it's worth a double click on that we've really impressed about this company when we did the S-1. This company spends very little on sales and marketing. Because again, it is targeting the headquarters of big restaurants and if you can win one of them, you can get thousands of sales in one. This company only spent 11% of its revenue on sales and marketing last quarter. That was down from 14% in the year-ago period. By contrast, it spent 40% on research and development. That was also down. But I love it when I see companies like this spending enormously on research and development and very little on sales and marketing and still producing incredible topline growth.

Lewis: Yeah. Given where they are with profitability and hovering around break-even and where they are with their cash flow, the fact that they have hundreds of millions of dollars in cash and equivalents, they can invest really heavily if they see really good opportunities to do so. They're in a spot where if they think they can really effectively spend with marketing, that's a tool that's totally at their disposal and they have the liquidity and the financial flexibility to pull it off.

Feroldi: You got it.

Lewis: Switching gears, Brian. I don't own this one, but I've been watching it intently and I'm actually a user of this product so I'm excited to talk about it. People might be expecting this conversation on the Monday show where they talk about financials, but we're going to steal this one. It's Lemonade. For folks who don't know the finsurance company, which is a fun little portmanteau that I haven't heard too much aside from used with Lemonade fun play on FinTech, Brian.

Feroldi: This is a company that has a lot of Fools feeling very excited and given their growth rates and their differentiated consumer experience, I understand why. But Dylan, you did the homework on this one. What did you see?

Lewis: We reported earnings earlier this week and not surprisingly, the company lost money this quarter a little bit more than expected. Revenue was at $23.5 million, they lost $49 million for the quarter. This is an insurance company. For all of the talk about the FinTech side of it and the tech element of it, at core it's an insurance business. What we need to be paying attention to here is the in-force premium. It's basically the annualized premium for customers as of the period ended. That was up 89% to just over $250 million, which was driven by a 50% increase in customers, 25% increase in premium per customers. The company counts just over a million customers to date. I think it's important to understand a little bit of the dynamics here because you can grow your customer count and that's going to lead to topline growth. But particularly in the insurance industry, you can grow by creating bundles, by creating expansion within the policy count that people have. 

One of the things that I was excited about in looking at the results from this quarter and what we got from management, is they're going to be launching a new car insurance product. I think a lot of people that have been watching this company for a while have expected this news. Early registration opened in April. Just for people who may not be super familiar with Lemonade, they currently offer renters, homeowners, term life, and pet insurance. As it is for me Brian, car insurance feels like a natural next step here. The huge issue with insurance is getting people in the mix and you see it with ads. It doesn't matter whose ads you see on the consumer side, they're all touting the bundle. They want you there for everything. I think that Lemonade's going to find a lot more upward mobility if they're able to collect in terms of premiums as they widen out their offering on the insurance side. There are also a lot of nice benefits there because it gives them the opportunity to expand their term, also diversifies some of their revenue basis when it comes to those insurance products.

Feroldi: Yeah, I love to see that. This is a company that has clearly got optionality in mind with entering all these different insurance options. I really like that they are also focused on Millennials, which are not the consumers that've been big on insurance. But if you can get them addicted to your product early and then grow that over time, that's a wonderful strategy. The thing that I don't fully understand about this company is because it's an insurer, the way you have to look at the financials is different than it is for a lot of other stocks. For example, you just said above $23 million in revenue in a $50 million quarterly net loss. That's a pretty wide gap between those two things. Not too often I'm interested in a company that reports to double the net loss than it did in revenue. What happened there?

Lewis: Yeah, there are a couple of different forces at play here. We have the fact that this is an early stage high growth business. I think they are about a $3 billion company and you look at most insurers, we're talking about tens of billions of dollars in market cap. But really a big part of this quarter and the story for this quarter was the company saw huge claims related to the freeze in Texas in February. The place that you're going to see that come through for this business is in their gross loss ratio. It's a pretty standard insurance industry metric, gives you a sense of the claims paid out versus the premiums earned. Typically, you would expect a sustainable insurance company to collect more in premiums than it pays out. That's what enables it to do it without getting any fresh injections of cash. Generally, we've seen the gross loss ratio for Lemonade somewhere in the low seventies and it's been steadily improving with time.

Lewis: Basically means more money is coming in premiums and they're paying out, which is what you want to see. In Q1 of 2021, that spike to 121%. That's 50% it went up. The company said basically they experienced a year's worth of claims in the storm's first few days. It's a pretty sizable one-time impact. But I do think it's important to note the EBITDA guidance for this company for the year remains basically in line with the consensus prior to the storm, and a big part of that is the reinsurance programs that the company has in place. We don't need to go too deep down into that, but the reality is this is, I think what you'll see is a one-time event and one of the difficulties that comes with being in the insurance industry. Brian, another reason that I'm happy to see them opening up that car insurance product and helping them diversify away from strictly being in the lines of business they are. I think it opens up geographically a little bit too.

Feroldi: Yeah. Again, I love the optionality here. I love the consumer focus. I love that they're using AI to not only help with customer service but to pay claims. I totally understand the appeal of this company from the consumer perspective. The thing that I always heard, and again, when you're thinking about an insurance company, you have to think completely differently than you do for a lot of other businesses, you can't just look at revenue and margins and all that stuff and make predictions. Because one thing that I thought I understood about Lemonade was that because of their reinsurance that the margin that they were going to earn was essentially fixed in place, because doesn't this company payout if they have excess premiums?

Lewis: That's my understanding, yeah. I'm still in the process of wrapping my head around this business a little bit. I think that that's pretty standard for the insurance industry and something you'd expect to see. They have a unique model and yeah, they are a little bit more charitable with the excess premium than a lot of insurance providers normally are. That is a big selling point for them as a brand and part of why they are considered one of those more mission-driven, more Millennial oriented companies, and certainly, a lot of people are coming online and meeting these types of products, which is where the appeal comes in. For me personally, I'm actually one of their customers. I have their renter's insurance and was flabbergasted at how easy it was to get signed up. It's dumb, simple to do. They came in at a more competitive price than anyone that I could see on the market. 

What I think is interesting with the insurance industry in general is we've seen the rise of companies like Lemonade that are more brand mission-driven, also more tech oriented. But Brian, we've also seen aggregators and basically people that will shop for you. There are businesses like PolicyGenius, which will go out there and get quotes from several different providers and then bring that to you. I think that is a little bit of a threat to the simplicity of Lemonade because you're able to shop multiple providers. But having gone through that process as a renter, Lemonade beat what I got from PolicyGenius, shopping around for multiple places. They seem to have some really strong pricing power and they are really able to pass that along, it's the strength of their data that they have, but I do wonder what that dynamic looks like for them over time. 

One thing that I did think was interesting, we got this new metric from management and it's their annual dollar retention number. They are defining ADR as a percentage of IFP, that premium number we talked about before, retained over a 12 month period, inclusive of changes in policy value, changes in the number of policies, changes in the policy type, and churn. We like to see this. This is something we tend to look at for software businesses, anything that has an ongoing relationship with the customer over time. Their annual dollar retention number has trended up over time. It's up into the right exactly the way you expect it to be, but it's at 81%. For a customer-centric, really strong brand, I would expect that number to be higher.

Feroldi: Yeah. We're used to looking at software numbers that are not only higher than this, they are in the triple-digit, meaning that not only is the company retaining on a revenue basis all of its customers, but it's actually getting more from its customers in any given period. Is that a fair comparison to this or is there something that makes this number not exactly comparable there?

Lewis: I think they are pretty similar. They might be different brands of apples, but I think to some extent it's an apples-to-apples comparison. It is a little worrisome to me to see it that low just given that the entire selling point and really the value prop to customers is the ease of use, the simplicity, and what you want to see with an insurance company long-term is they bring people in and they keep them long-term. They established a great relationship with them, they have great data feedback coming in through their customers and their actuarial systems are only getting better as they retain those customers. It's a little hard to tell how to interpret this because this is the first look we're really getting at it as a business. Great to see that it's improving but a little lower than I thought it would be.

Feroldi: Well, on the flip side, this company is primarily focused on renter's insurance. How long did people rent for, a year, maybe two years? I don't know what the averages are, to be honest, but I can see just a lot of churn in that business just by that very nature of the thing they are given out. Again, you can't necessarily compare that to a competitor like Olo. That once you're a customer, of course, you are going to be a customer there for 10+ years. But as you pointed out, it is trending in the right direction, and there might be some dynamics that caused that number to fluctuate. I'm glad that they report it, but yeah, I agree, I would like to see it higher.

Lewis: Yeah. Thinking again about where this business is going and the roadmap for them. If they are able to offer things like car insurance and create underling then they have policies that are going to follow up people as they transition through different phases in their life. Maybe for them, they grab someone when they're in their 20's as a renter, perhaps then they add a car, maybe down the road, it becomes a homeowner's insurance policy and a car. You want to be able to be there for the lifetime of your customer and continue to build out products that suit wherever they are in their life. I think they are doing that, and I think that number is going to improve over time as they do. But I do think that of the things to look at on the report, the incident in Texas, that's a one-time event. There are always going to be those possibilities. It's one of the risks of being in the insurance industry. But in terms of core business metrics to keep an eye on, I think this is one of the most important ones.

Feroldi: Good to know. Based on this report ,Dylan, are you more interested in becoming a shareholder or less interested?

Lewis: I think it stays precisely where it was. I've had nothing but really great experiences as a user, and because of that, it's staying on my watch list. I need to really keep diving into the insurance industry and make sure we got a really good grip on it. Just because this business is so much different than so many of the companies that we talk about often. But I like a lot of what we see and I think if we start to see that trend emerge of more money coming in from existing customers because of that bundling. I think that's a really good sign and something that would make me very interested because they have a tiny piece of the insurance industry. Most people really don't like their insurers. It's an oppositional relationship. If you can create brand affinity in the insurance industry, they're only a $3 billion business. There's a lot of room to grow.

Feroldi: If this business doesn't work out it's not because the opportunity wasn't there.

Lewis: Right. Yeah. Highly fragmented business, a lot of customers don't like their existing provider. What more could you ask for?

Feroldi: Exactly.

Lewis: All right. We have one more stock going to be talking through and that is Jumia. I think folks probably have heard us talk about this one on the show before. This is commonly known, Brian, as the Amazon of Africa.

Feroldi: This is not a company that I was super familiar with, although I do know the gist of the company. What's funny about Jumia is that it is a lightning rod of a stock, even internally at The Fool, I know people that own this stock, and I know people that are betting against this stock, so it is a fascinating company to watch and if you were to take the gist and just say the Amazon of Africa, that sounds exciting. Everybody knows that Africa is a developing continent. There are billions of consumers there, purchasing power is growing, Internet access rates are far lower than they are in developed parts of the world. Again, this is a company that if it works, the opportunity is massive.

Lewis: Really, I think what is so compelling about this business, just from a core thesis standpoint is, we have seen this model work. We've seen it work in the United States. We've seen it work in other parts of the world. It contours up a lot of the same thoughts as MercadoLibre and we can get into some of the specific business segments that help illustrate that. But because you've seen it work in so many places, you would think it's got to work here too.

Feroldi: More importantly, name any big billion-dollar e-commerce company. Where are they not operating? Africa. They are everywhere but Africa because it's so hard to do business there. Again, Jumia has a massive challenge, but if they can make it work, the opportunity is huge. Now Jumia, if you rewind the clock a little bit, this company was established a couple of years ago and they were really in growth at any cost model for a long time. They were a first-party seller, which means that they would physically inventory and house the items that they sold and then ship them out. A few years ago, they shifted their focus from being a got a grow at any cost, modeled to being "let's actually focus on profitability." Because of that, they're shifting their sales from being primarily first-party, the way let's say, Amazon did when it was first created to being more of third-party, which is more like an eBay model, where they're just a platform that enables commerce to happen. As a part of that, the company has been ramping up its investments into its payment platform, which it calls a JumiaPay. That is something that the company has really emphasized. Then a few years ago, and actually because regionally it was focused on profitability. It actually exited a couple of markets that it was in Cameroon, Tanzania, and Rwanda in 2019, as it has increased its dependence on these third-party sellers. As a result of that, when you hear this company's revenue number, you might not be impressed. But if you have that context in mind, it makes a little bit more sense.

Lewis: Yeah, I think the books of this business look exactly like the books of a business in transition. We talked about it with companies that are making that transition from the license model to a Software-as-a-Service model. But the books look ugly for a little while, and that's certainly the case here because for as exciting as an e-commerce play in a development part of the world is, you would expect the growth rates to be astronomical and that's not the case, at least the topline here.

Feroldi: Yes, and another thing that makes us even more wonky is currency movements. This company is denominated in Germany, so it reports in Euros, but it does business in all these other African countries that have their own currencies. Then the numbers we're seeing get translated back into U.S. dollars. This is a company that you really have to look beyond just the headline numbers and focus on some of the core operating metrics. Let's dig into some of those. The number of active customers on the platform grew 7% to 6.9 million. The number of orders on the platform grew 3% to 6.6 million and gross merchandise volume fell 13% to $165 million. Management explained on the call that they are purposely shifting away from high ticket items like electronics, toward more low-priced, everyday, everyday purchases in order to deepen their relationship with their consumers. That explains a 13% jump in gross merchandising involvement. On the payment side, the numbers look a little bit better. The total payment volume using JumiaPay grew 21% to $43 million. Excuse me, the total payment volume grew to 21% to $43 million, and the number of payments on the platform grew 7% to $2.4 million. Add all that together and factoring currency movements, and that explains why revenue dropped 6%. However, because they are shifting away from first-party and toward third-party sales, gross profit actually rose 11%. So that's why the context there is so key.

Lewis: Yes, and it's hard to follow, but it makes sense when you start taking management's commentary and pairing it up with the financials. I think it is something that benefits from the long term, but we still need to see all of the gear start moving together. Right now we're starting to see some of it where we have the number of orders going up. That would imply that it's not rapid growth, but at least sticks with the lower-cost, more frequent purchase narrative. But then yet to see GMV going down, that makes sense. You are taking higher-priced items away. That's just what's going to happen.

Feroldi: I mean, the first thing I thought when I saw these numbers was management really emphasized gross profit grew 11% and I was like, "You know another company that's really focusing our gross profit now is Square because of their Bitcoin investments. They're really focusing on gross profit." That's the story that this company is trying to tell, focusing on gross profit there. On that front, it grew 11%. They also did a good job of bringing down, cutting costs out of the rest of their business. While they did produce an operating loss and adjusted EBITDA loss of $27 million, that figure was down 24% year-over-year, which again is a faster rate of decline than revenue, since it's a negative number, that's actually a good thing. Their net loss was almost cut in half to $21 million. The losses are getting lower and this company has been issuing stock like crazy for the last couple of months to bolster its balance sheet, it now has 4485 million in cash on the books. While the growth rates don't look good, the company is executing on its plan.

Feroldi: Yes, and I mean, for folks that have found business for a little bit, if those share issuances, I don't know the timing of those, Brian, but if those have been within the last five months or so, they're doing it at a much higher valuation than they spend most of 2020. This is a business that looks like it was on a rocket ship. If you bought it in mid-2020, you're sitting on a multibagger. In some cases, almost 7% returns depending on when you bought. But, I mean, we got to see what they do from here as now a $2.5 billion business.

Lewis: Yes, to your point, in March of last year, this was a single digit stock between $3 or $4. In February of 2021, this stock was in the $60s. You're talking about 20 extra turns if you bought in at the bottom. More recently, the stock, like every other growth stock, has been heading in the opposite direction. Now this is back to $25. Yes, depending on what you get in, the store could look great or terrible. But if you're focusing on the operation results, again, not that impressive growth, but operationally, they're doing what they need to do in terms of profit.

Feroldi: I think that's right and, I mean, I called them the Amazon of Africa before. I think the MercadoLibre of Africa is probably a little bit more appropriate specifically because when you look at the JumiaPay segment, it's probably the thing to be most excited about when you look at this business, it's 20% growth in total payment volume. The number of transactions was up 7%. I mean, both of those numbers are doing better than what we're seeing on the e-commerce side. Think about the roadmap and how MercadoLibre built-out Mercado Pago. This started as something that enabled On platform transactions and has blossomed into basically the PayPal, Venmo style, peer-to-peer and off-market option for folks in those geographies. It's not crazy to take something like JumiaPay and forecast out that it could become something similar, which is a very compelling business in and of itself. You can pair that with an e-commerce platform, especially one that has been moved over to a third-party seller and maybe has a little bit more attractive business model. To think that that's packaged, a really interesting business.

Lewis: It could be, but let's not call it the MercadoLibre of Africa unless we say, we accept minus all the growth that MercadoLibre does put up. But yes, to your point, JumiaPay is an interesting product that is making success. The company did note that 37% of orders that were honest platforms or that were made during the first quarter did use JumiaPay. That was up significantly year-over-year. JumiaPay actually has a loan division where they're actually making loans to some of their sellers. The number of loans that they made grew 90% to, they made loans, 291 unique sellers. I'm not sure how comfortable I would be with this company making loans, but they think that they know that their customers are serially underbanked, so it can make sense to fulfill that need if indeed they do have credits. That's a good credit score. 

Another thing that's interesting to note about this company is that they have a network of pickup stations throughout the countries that they operate in, and they are rapidly growing this. They currently have over 1,600 pickup stations throughout Africa and these are places that they can shift their deliveries to and then customers come and pick them up, very similar to an Amazon locker situation, and they noted that a lot of customers actually prefer to use the locker pickup instead of having a delivery done to their house. That might be just one of those works of consumer preferences in Africa. But they see that as a major long term differentiator for this company that will keep people loyal to the platform.

Feroldi: Yeah, and it makes a lot of sense. I totally get it from them from a logistics perspective, it's a lot easier to pull something like that off too.

Lewis: It is, and they can offer their customers lower prices because they don't have to pay a third-party logistics provider for the shipping. Consumers might like that it is not already, might be more convenient, and more secure, but the option to have it be lower-priced, that's an attractive combination. Yeah, there's another element of this business that I think we might tee up and then it will sound awfully familiar to people who have been following other marketplace businesses, Brian, and that's the advertising arm that they are building up. That is an experiment that they are working on and we have seen success on Amazon with the likes of SC. This company does know that it has an audience base that is attractive to a lot of advertisers. 

The company did note that they ran over 283 ad campaigns on behalf of more than 137 advertisers, including some big name companies like L'Oreal, adidas, and Unilever. That is a potential growth avenue for this business. Another growth avenue for this business is they're testing a product called, wait for it, Jumia Prime. I wonder where they got that name from, and that is exactly what you would probably guess it would be. It's a loyalty program where you subscribe for a monthly fee and then you get free delivery as well as access to a number of other benefits. They're just in the testing phase on that product, but we have seen prime light products work wonders on lots of other e-commerce sites where if a consumer is willing to pay to become that the number of orders that they make sky-rocket. That will likely be a test that works out and gets deployed everywhere they can.

Feroldi: When you put all of these things together, I think it's easy to see why Jumia is a no-brainer watch list stock for me. It's a business that has a ton of optionality. The payments are interesting. Advertising, we know on the digital side, is a wildly high-margin business and can be really great if you have some other low-margin businesses to help boost your gross profit across-the-board.

Lewis: Prime is interesting, Logistics-as-a-Service is interesting, the e-commerce platform itself is interesting. Honestly, I just want to see it come together, Brian, because I think there's a lot to like here. I just don't quite have enough signs that the market place has traction. I think that that's the thing that makes everything else go.

Feroldi: The other thing they noted that is worth highlighting is that they're still dealing with the effects of COVID where they are. We do know that the timing of COVID has hit different geographies around the world at different times and they are still in the thick of it over there. As a result, that might be one of the reasons why the numbers that we're seeing are not that impressive in a post-COVID world. Could that be an accelerant for these guys? It's definitely possible. To your point, this company has massive potential and they have a lot of optionality and growth irons on the fire. If they can execute, the potential here is huge, but that's a big if.

Lewis: It's a big if. I think what's key with this is a lot of this optionality is built off the thriving marketplace. The payment system being valuable, you can have a wonderfully beneficial peer-to-peer system. But if you can use it to interact with merchants at scale, that's really wonderful. Advertising is most valuable when you have a ton of users on our platform and you want to get your product in front of people that are already shopping for something. The logistics and the prime, all these things require a thriving marketplace. I buy the narrative that's coming from management where they're focusing on what they think might be more useful, and maybe more habit-forming purchases for their customers. For me, I want to see orders moving a little bit faster than 3%. That's where I'm getting stuck.

Feroldi: I think that's a completely fair thing to look for. Optionality is great when it can augment the existing business. Optionality isn't great when it's, hey, we have all these other things that we could do because our core business isn't doing what we want it to do. To me, Jumia is in the latter camp right now. Sure, they have lots of potential growth irons on the fire, but I want to see the core business rocking and rolling before I care about those other things.

Lewis: Brian, we talked about three different companies today, you don't own any of them. I'm going to put you on the spot here. If you had to force rank them, what would your No. 2 be?

Feroldi: My No. 2 would be Lemonade for sure. To me, I look at Jumia and I just think the company is just not showing me anything that makes this compelling, especially when you think about all the other e-commerce companies that are out there in the world that are just thriving. Some of those companies are putting up 50%, 60%, 70% customer growth and revenue growth. When you compare that to Jumia, it's clear to me that they are still struggling. Without knowing the question, I answered a little too early. I thought you were going to say, "Which one is your favorite?"

Lewis: That's always dangerous.

Feroldi: But to me, No. 1, Olo, by far, I still can't wrap my head around Lemonade, so that would be No. 2, and then a distant third would be Jumia. But how about you, Dylan?

Lewis: Yes, I think I would put Lemonade and Jumia in a similar footing. Like I said, they're both on the watch list for a different reason. I think the path is a lot clearer for a company like Lemonade. We talked about it before. The term story in the fragmented insurance market, it's right for disruption and people want to be delighted in that space in a way that they're not currently being delighted. I think that path forward is a lot easier for them. Jumia, I think the upside is incredible if they're able to execute. We've seen the story play out. Being a MercadoLibre's shareholder, being an Amazon shareholder, I've been rewarded for buying into e-commerce thesis before. I need a couple more signs that that thesis is on track before I buy in.

Feroldi: Jumia is a $2.5 billion company. If this company really started to execute well and put up the growth numbers that we want, and you still bought into it when it was a $10 billion company, that to me doesn't matter because if this thesis is work, what could it be worth? This could be a $100+ billion idea in time, maybe even more, so I would not think that, man, I missed this if I didn't invest now. But I want to see clear signs that this model is working wonders before I would even consider putting it on my radar.

Lewis: That's exactly right, and we talk about it all the time. I'm happy to trade some upside for a little bit more certainty, and there are other people who are happy to take on a little bit more risk, and maybe that's where this is already in their portfolio. But if I start to see that certainty manifest, I'm going to be pretty interested in the upside.

Feroldi: Fair enough. There's a lot to like there.

Lewis: All right, Brian, thank you so much for joining me as always. Hope you have an awesome weekend.

Feroldi: You too, Dylan.

Lewis: Listeners, that's going to do it for this episode of Industry Focus. If you have any questions or you want to reach out and say, "Hey", shoot us an email at [email protected] or tweet us at @MFIndustryFocus. If you're looking for more of our stuff, subscribe on iTunes or wherever you get your podcasts. As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for his work behind the glass today, and thank you for listening. Until next time, Fool on!