Jumia Technologies (JMIA +3.39%), often declared the "Amazon of Africa," is a pan-African e-commerce platform that serves as a marketplace connecting sellers to consumers. The company operates in three regions, which comprise 11 African countries that together represent more than 70% of Africa's total GDP. Jumia's total addressable market of 1.4 billion consumers – much larger than North America's population of 373 million – offers the company a lucrative opportunity.
Still, Jumia has struggled in recent years to achieve the growth that many investors were hoping for. The company still remains Africa's biggest e-commerce player, generating more than double the amount of monthly visits than the next largest company. With Africa's e-commerce market set to grow at a compound annual growth rate (CAGR) of 10.5% to $46.1 billion by 2025, Jumia is well-positioned to be the leading beneficiary. Let's discuss three keys to propelling Jumia toward profitability.
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1. More robust top-line growth
For being a company with tremendous growth prospects, Jumia's revenue numbers haven't been very impressive in previous quarters. In its most recent quarter, Jumia increased revenue by 9% year over year to $42.7 million. Single-digit top-line growth won't cut it for Jumia if it ever wants to become profitable. The company is growing its operating expenses at a much faster rate than revenue, as evident in the 94% growth in EBITDA loss that the company reported in its most recent quarter. I'm a supporter of management's decision to boost its marketing and technology investments in order to attract more consumers. That said, if I don't see considerable top-line improvement stemming from its investments in the subsequent quarters, I will likely reconsider my position in Jumia's stock.
JMIA Revenue (Quarterly) data by YCharts
A recent change to the company's business model induced a shift toward the sale of more everyday product categories. And while Jumia's average order value declined 32.5% from 2019 to $28 in the third quarter, the hope is that more affordable products will lead to a higher frequency of larger orders. We'll have to let this one play out, but small changes have begun to transpire: Jumia increased gross merchandise volume by 8% to $238 million in its most recent quarter.
I like this move by management because I think that spotlighting everyday products will lead to a rise in customer retention. Simply put, people don't buy phones or televisions very often, but they need items like paper towels and soap on a weekly basis. In order to spark more substantial growth, however, the company will need to attract new customers to its platform.
2. Scaling the platform
Revenue growth is largely driven by Jumia's ability to scale its platform. Knowing this, the company has significantly amped up its spending on marketing and technology. In its third quarter, Jumia allowed its sales & advertising and technology investments to grow 228% and 27% year over year, respectively.
This led to a 28% increase in total orders up to 8.5 million, a record orders number and fastest year-over-year growth in the past seven quarters. The number of active annual customers grew 8% to 7.3 million, but it will likely take several quarters until we witness the full effect of Jumia's current investment strategy. Jumia's aggressive spend on the marketing and technology fronts is certainly a risky endeavor, but it is likely a necessary action the company needs to take. Africa has been slow to adopt e-commerce, so companies must work diligently to spread awareness and attract new customers.
3. JumiaPay
JumiaPay, a full-fledged mobile payments service, could be the company's saving grace in its efforts to achieve profitability. Similar to PayPal's functionaility, consumers can leverage the JumiaPay platform to pay for goods and services online. Total payment volume for JumiaPay reached $64.5 million in the third quarter, representing 15% growth year over year. Likewise, the number of JumiaPay transactions grew 34% to three million.
In August 2021, Jumia partnered with the National Bank of Egypt to offer several financial services via JumiaPay, which was a major achievement for Jumia's business. According to Statista, Africa is the number one region for mobile money services, accounting for $490 billion in transaction value throughout 2020. Thus, JumiaPay could become invaluable for the company in the long-run, all while serving as additional support until the company builds out its e-commerce platform.
I believe JumiaPay is the company's most promising segment. Still in the earliest phases of monetization, JumiaPay is experiencing faster growth than any other areas of the business. Given Jumia's strong cash position and lack of debt in relation to equity, the company can leverage its geographic footprint to expedite the expansion of JumiaPay and solidify itself as a leading fintech player on the continent.
We'll have to wait and see
As a company, Jumia has excited me for a long time. The potential reward is massive, although the risk of Jumia never reaching profitability is still substantial. Jumia's inability to demonstrate meaningful progress and ultimately achieve profitability would result in negative shareholder returns and in a worst-case scenario, bankruptcy.
I have a small position in the company and would need to see improvements in its ability to increase sales, scale its business, and expand JumiaPay before buying additional shares. If the company can touch on those areas moving forward – which would carry it closer to profitability – then more investors will pile into Jumia's stock.
