Jumia (JMIA 11.30%), the German company that owns one of the top e-commerce marketplaces in Africa, was once considered a promising growth stock. It went public at $14.50 in April 2019, and its stock opened at $18.95 before soaring to an all-time high of $65.51 last February.
But today, Jumia's stock trades at about $7. Its decelerating growth and widening losses made it an easy target for the bears as rising interest rates drove investors toward more conservative investments.
Image source: Getty Images.
However, the bulls believe Jumia could still grow significantly over the long term as income levels and internet penetration rates rise across Africa. They'll also argue that its stock is dirt cheap at three times this year's sales.
Jumia is still a polarizing stock for the bulls and bears, but two recent developments -- which can be respectively considered a red flag and green flag for its future -- might drive more investors toward both camps.
The red flag for Jumia: Amazon's plans for Africa
Amazon (AMZN 1.30%) could expand into five new markets in 2023, according to a series of recently leaked internal documents. Those markets include Belgium, Chile, Colombia, Nigeria, and South Africa. Amazon also expanded into Egypt, its first African market, last September.
Nigeria, South Africa, and Egypt are three of Jumia's 11 main countries in Africa, and that combined footprint covers 46% of the continent's population of 1.4 billion and 69% of its 590 million internet users. However, Jumia served only 3.1 million quarterly active users in the first quarter of 2022 -- which suggests the market is still fragmented.
In theory, Amazon could crush Jumia with its superior scale and stage a broader expansion across Jumia's other regions -- which include Ghana, the Ivory Coast, Senegal, Algeria, Morocco, Tunisia, Kenya, and Uganda.
Last year, Jumia's revenue only rose 12% to $178 million as its operating loss widened from $170 million to $241 million. Its revenue growth will likely decelerate with even wider losses if Amazon ramps up its African business.
The green flag for Jumia: The possibility of a takeover
Amazon's potential entry into Africa is alarming, but Citron Research's Andrew Left recently suggested that it would be much smarter for Amazon to simply buy Jumia for $1 billion -- a 40% premium to its current valuation -- instead of building its own platform and logistics network.
Amazon could easily afford the acquisition, since it ended its latest quarter with $66.4 billion in cash, cash equivalents, and marketable securities. It also wouldn't be unprecedented, since Amazon bought Souq -- the leading e-commerce player in the Middle East -- for $580 million in 2017 and subsequently rebranded its marketplace as Amazon.ae.
Amazon would initially inherit Jumia's losses, but it could eventually clean up that red ink by eliminating redundancies and integrating its operations. Directly buying Jumia would also allow Amazon to avoid a margin-crushing pricing war against the regional leader.
Which of these outcomes is more likely?
As an Amazon investor, I believe it makes more sense for the company to buy Jumia instead of competing against it. A $1 billion price tag would arguably be a steal -- since Jumia was valued at $1.1 billion at its IPO price.
Yet other parties might also be interested in buying Jumia. Leo Stan Ekeh, the founder of the Nigerian tech company Zinox Group, has reportedly been accumulating more shares of Jumia over the past year.
Zinox already owns the Nigerian e-commerce marketplace Konga.com, so Ekeh might be considering a takeover of Jumia to merge the two rivals. In late May, Zinox said it wasn't interested in buying Jumia for "now", but I wouldn't be surprised if a bidding war erupted in the near future.
Jumia still faces a lot of challenges, but I think its downside potential is limited. I'd never buy a stock just to wait for a buyout, but I think Jumia's long-term value to Amazon, Zinox, and other companies shouldn't be ignored.
