Jumia Technologies (JMIA -2.81%) is aiming to become the de facto online marketplace and digital payments provider for the entire African continent, which sounds like an amazing opportunity. And indeed, it might be quite a rewarding long-term investment in time. But for now, Jumia is still a money-losing machine.
It reported earnings results for the first quarter on May 11. The company's operating loss for the quarter was 33.7 million euros ($41.1 million). That was greatly improved from its operating loss of 43.7 million euros in the first quarter of 2020, but it's still substantial.
However, even with ongoing losses like these, there are some reasons to be excited about Jumia.
Image source: Getty Images.
Here's what's exciting about Jumia
First off, pattern recognition is a key trait of successful investors. Over the years, some of the greatest investments were companies that set out to do what Jumia is trying to do. In North America, we have Amazon, up over 160,000% since its initial public offering. And in South America, there's MercadoLibre, which is up almost 5,000% since it went public. Even if Jumia can achieve only a fraction of the success these companies have enjoyed, it has amazing upside potential considering its market capitalization is still under $3 billion.
But perhaps the most compelling reason to give Jumia stock a hard look is due to one of the biggest global trends that hardly anyone is talking about. Africa's population is expected to double over the next 30 years -- the sharpest growth anywhere on the planet. If current trends continue, Nigeria (one of Jumia's core markets) will have a larger population than the U.S. by 2050.
In short, Jumia is focused on bringing e-commerce and digital payments to what's perhaps the fastest-growing and most underserved regions in the world. This alone makes it an interesting opportunity.
Moreover, the way Jumia is pursuing this could be very scalable. The company recently moved away from prioritizing first-party sales. Rather, it's focused on developing the infrastructure and logistics to make e-commerce possible. As more consumers and businesses in Africa embrace the digital-commerce trend, Jumia could be one of the only companies prepared to facilitate the shift.
Image source: Jumia Technologies.
The present hurdles to overcome
Jumia is working on inventory management and shipping logistics. This infrastructure buildout is pricey but necessary. So we can give the company a partial pass for ongoing operating losses for now. What matters more at the moment is growth in sales volume, customers, and payment volume. These three things are indicators of the adoption of Jumia's platform.
Jumia is growing in all three areas, but the growth is modest. In 2020, its active customer base grew 12% year over year while gross merchandise volume (GMV) fell 19%. However, the dip in GMV was due to a 46% drop in first-party sales, which was intentional. In the first quarter, GMV was down 13% from the comparable quarter of 2020 due to a 35% drop in first-party sales. But active customers were up 7% in the first quarter. From these two reports, we can say third-party sales and new customers are growing, but at a modest pace.
Payment-volume growth for JumiaPay looks much better on the surface. For 2020, total payment volume (TPV) was up 58% from 2019. And for the first quarter, TPV was up 35%. However, this is strong growth from a small starting point. TPV was only 43 million euros in the first quarter. For perspective, first-quarter TPV for MercadoLibre's Mercado Pago was $14.7 billion, up 82% year over year -- much better growth from a much higher starting point.
To summarize, Jumia is well positioned with a growing global population. But adoption has yet to reach an inflection point. Therefore, today's investor will need to demonstrate extreme patience when buying Jumia stock. If it pays off, it will take time.
The verdict
Jumia isn't a stock I intend to purchase right now. I want to see more from this company before I allocate my investing dollars, even if I risk hopping onto the bandwagon a little late. After all, if Africa's digital opportunity is as big as some believe, I can be late to the party and still earn good long-term returns.
Specifically, I want to see an uptick in growth rates for GMV, new customers, and TPV. Additionally, remember that JumiaPay isn't being monetized right now. If management lays out a monetization plan, that would be something that would make me reconsider buying shares.
But if someone wanted to pick up some shares of Jumia today, I would recommend buying a small position in a diversified portfolio, understanding this is a riskier holding. I would also buy with a minimum holding period of five years, to give the company time to finally reach an inflection point for growth.
