Investors wanted anything that sounded "futuristic" for their portfolios in 2020 and 2021. This included sectors like electric vehicles or the space economy, industries with little proven financial results but ginormous future "total addressable markets" to capture. At least, that's what their investor slide presentations said. Two years later, almost all of these new economy stocks have crashed and burned, losing investors hundreds of billions of dollars in the process.
One of these hyped-up new-age stocks was Jumia (JMIA -1.62%). Dubbed the "Amazon of Africa," shares of the stock rose over 1,000% during the market bubble period in early 2021. Now, with losses piling up, slowing growth, and the popping of the technology bubble, shares have tanked over 90% from those lofty highs.
But the worst might be yet to come for Jumia. Here's why investors should continue to avoid the stock going forward.
Q4 results: Belt-tightening is starting
Jumia's strategy to win the e-commerce market in Africa was aggressive, to say the least. The platform launched in over a dozen major countries on the continent, trying to grow at all costs regardless of how much cash it burned. For example, in 2021, the company made $178 million in revenue but generated an operating loss of $241 million. And that makes its financials look better than they actually are. If we include high variable costs and fulfillment expenses, Jumia only generated a contribution profit of $21.8 million in 2021, which looks rather small compared to its $240 million operating loss.
Last year, the board of directors realized how unsustainable this strategy was and replaced the current executive team, bringing in more rational leaders. Now, new management is initiating major cost cuts. These include layoffs, exiting unprofitable segments like logistics-as-a-service and grocery delivery, and bringing office employees from high-cost centers like Dubai to its local African economies. Management thinks it can trim tons of costs from its marketing and corporate budget in 2023, bringing in huge savings for the business and narrowing its operating losses.
Are macroeconomic headwinds temporary?
In its fourth-quarter report, Jumia's new management blamed supply chain problems and foreign currency fluctuations for its slowing growth in U.S. dollar terms. They believe these concerns are short-term in nature due to all the disruptions that happened to the global economy in 2022.
But are macroeconomic headwinds likely to be temporary in Jumia's core markets like Nigeria, Egypt, or South Africa? I don't think so. If we look historically, macroeconomic headwinds and hyperinflation seem to be the norm, not the exception, when running a business in Africa. Just look at Egypt, one of Jumia's core markets, whose currency has depreciated by almost 50% versus the U.S. dollar in the past year. Betting these disruptions won't happen to Jumia over the next decade is a foolish stance to make, one that does not take into account all the different risks of operating a retail platform in over a dozen African nations.
Yes, foreign currency fluctuations and supply chain disruptions are outside of Jumia management's control. But they also happen much more frequently in Africa than in North America or Europe. This is something to not take lightly if you own shares of Jumia or are thinking of buying shares because of the recent price drop.
Future unit economics are uncertain, to say the least
Even if Jumia doesn't face macroeconomic headwinds over the next few years, this business model is not sustainable. Let's run some math to show why. Assuming Jumia can eventually cut its operating expenses in half from 2022 levels, the company will be spending $131 million annually on marketing, technology development, and corporate overhead. Its current annual contribution profit after subtracting fulfillment expenses is $21.8 million, which is a lot smaller than $131 million. And this is assuming making drastic cuts to marketing won't affect its top-line revenue, which seems like a foolish assumption to make.
With only $228 million in cash on the balance sheet, Jumia is going to have to raise money soon. In order to raise funds, Jumia will have to heavily dilute shareholders through a share offering or raise debt. With minimal debt on the balance sheet, Jumia likely has some room to add some debt. But with rapidly rising interest rates from the Federal Reserve and no history of profitability, this will likely come with extremely high annual interest payments, which will further separate Jumia from the elusive positive net income.
JMIA Market Cap data by YCharts.
Today, Jumia trades at a market cap of $337 million. You might think this is cheap compared to its market cap of $3 billion to $6 billion in 2020 and 2021. But a company with no path to profitability will never generate any economic value for itself. Unless Jumia can prove it can actually generate cash that it can distribute to shareholders, the stock will remain uninvestable.
