Shares of Jumia Technologies (JMIA -3.59%) popped 12.6% this week, according to S&P Global Market Intelligence. The African e-commerce, payments, and logistics company reported strong growth in the first quarter that likely impressed the investor community. At one point, the stock was up 21.9% this week, and as of this writing it is up 12.1% since last Friday's close.
Jumia operates as an Amazon clone in many African nations. It has an e-commerce platform, logistics services, its own payment application, advertising services, and many other products similar to the North American technology giant. In the first quarter, the number of active customers grew 29% year over year to 3.1 million, and gross merchandise value (GMV) -- or the amount of money spent on its platform -- grew 27% year over year to $253 million. This translated to $47.6 million in net revenue in the quarter, up 44.3% year over year.
While growth looked solid, and is likely why the stock popped this week, Jumia still has enormous operating losses. In the first quarter, its gross profit was $27.7 million, up only 12.6% year over year, meaning it is seeing sizable gross margin compression. In the quarter, it spent $24.3 million on fulfillment, $18.8 million on advertising, and $13 million on technology expenses. Adding in its general overhead expenses, the company had an operating loss of $66 million in the first quarter, or an operating margin of negative 140%. Clearly, this is not sustainable.
Jumia has many initiatives going on in many different countries. One of these, JumiaPay, just got a license to process payments in the large country of Nigeria. Investors will need to track the progress of these new products, because all the investments it is making right now are contributing to huge operating losses. In the future, the company will need to get a return on these investments in positive earnings and cash flow.
If you thought Jumia's operating losses were bad, its cash flow is worse. The company burned $75 million in operating cash flow in just the first three months of this year. With only $89 million in cash and equivalents, management is going to have to either turn around its operations quickly or raise money through the capital markets. This is bad news for investors, as either shareholder dilution through an equity offering or an increase in debt through a bond offering will lower returns -- all else equal -- over the long haul.
Don't be fooled by this one-time bump. Jumia is a business in an incredibly difficult operating environment, and investors should stay away until it can prove it has any path to sustainable profits.