Emerging market stocks like MercadoLibre and Coupang tend to receive plenty of love from investors. That said, it seems like one area -- one large area, that is -- of the world is typically excluded from most conversations: Africa. I'm not sure why that's the case. After all, Africa is home to 54 countries and 1.4 billion people, granting businesses limitless opportunities for innovation and growth.
Jumia Technologies (JMIA 11.30%) is an Africa-focused e-commerce company that also operates in the financial technology (fintech) and logistics arenas. Africa is forecast to eclipse half a billion e-commerce users by 2025, equal to a compound annual growth rate (CAGR) of 17%, but what's mind-boggling is that such a projection only represents a 40% penetration rate on the continent. Thus, it's beyond doubt that the long-term potential of Jumia's business is through the roof.
The company delivered its second-quarter earnings report on Aug. 10, inducing a nearly 20% spike in its stock price. Even so, the African e-commerce stock is still down 68% since going public in 2019, so it's not too late for investors to hop on board. On that note, let's look at Jumia's existing situation to help determine if it's a deserving investment right now.
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Jumia's business is gaining traction
In its second-quarter outing, the e-commerce business grew total sales by 42.5% year over year to $57.3 million. Other key operating metrics improved as well -- active customers increased 25.9% to 3.4 million, and total orders rose 35.5% to finish at 10.3 million. Gross merchandise volume (GMV), which indicates the total value of all goods sold on the platform, also climbed 21.3% to $271.1 million.
There is one caveat to consider, however -- the company endured an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $57.2 million during the quarter. Operating losses are nothing new for Jumia, but management does seem optimistic about the company's future.
Although it reiterated guidance for an adjusted EBITDA loss between $200 million and $220 million for the full year, executives stated that its largest quarterly losses are in the past and that 2023 should be a markedly better year on the profitability front.
Meanwhile, total payment volume (TPV) from its JumiaPay business surged 31.1% year over year to $74.2 million, and the number of transactions increased 25.9% to 3.4 million.
Starting in fiscal 2023, JumiaPay will generate off-platform payment processing revenue via third-party merchants. In my opinion, this is a major catalyst to watch for and certainly an enormous opportunity for Jumia's overall business considering the sizable addressable market of Africa's mobile payment industry.
Should investors pull the trigger on Jumia?
Rightfully so, the primary concern investors have about Jumia is its ability to become a profitable business in the long run. Up to this point, management has ramped up spending in order to grow the business, but it seems like the company's biggest quarterly losses are in the past. Progress is being made, and although it may take some time, investors who buy at today's levels could enjoy massive gains down the road.
It doesn't come with little risk, however. The e-commerce company currently has $350.8 million in cash, cash equivalents, and investments, so it has bought itself sufficient time before needing additional funding. That said, it's crucial that Jumia continues to expand its business while cutting its costs in the coming quarters.
But given its latest upturns, enormous market potential, and thinned stock price, I believe Jumia carries a favorable risk-reward profile today.
