Jumia Technologies: An Investment In The Reopening And Digital Future Of African Economies
Summary
- JumiaPay demonstrated strong adoption and growth numbers. Logistics and advertising showed promising potential.
- User growth remains sluggish but promises to accelerate after more investment and the end of pandemic-related headwinds.
- Expect more volatility and a wide range of outcomes for Jumia's stock price in 2021.
Jumia Technologies (NYSE:JMIA) has experienced a dramatic run-up in the price of its shares since bottoming with the stock market last March. Ahead of the Q4 2020 earnings report, JMIA even surpassed the all-time high from the days following its IPO in April 2019. This latest earnings report is an opportunity to take a hard look at Jumia's prospects relative to its current stock price.
Jumia Technologies took the roller-coaster path to its current lofty levels.
The earnings report was as bullish as ever, but JUMIA's sales and user adoption results were negatively impacted by the COVID-19 pandemic. These impediments make Jumia one of Africa's re-opening plays. Political instability in Nigeria and Uganda are also clear and present risks to the company. As a result, JMIA did not provide specific numbers for its guidance in its year-ending report:
"Our focus continues to be on making further progress towards breakeven and we remain committed to reducing our Adjusted EBITDA loss in absolute terms in 2021 compared to 2020.
The ongoing COVID-19 pandemic as well as the ensuing economic challenges result in substantial uncertainty concerning our operating environment and financial outlook. This may be further exacerbated by instances of social protests or political disruption, as experienced in Nigeria over the course of October 2020 as part of the End SARS campaign or in Uganda in January 2021 where internet was suspended ahead of the presidential election.
These external factors, combined with continued focus on cost efficiency and, to a lesser extent, the continued effects of the business mix rebalancing, are likely to drive continued volatility across some of our key performance indicators."
For this report, I focused on JumiaPay and user growth and adoption. I took a new interest in Jumia's logistics and advertising businesses.
JumiaPay
JumiaPay is the company's digital payments platform. The following slide from the earnings presentation summarizes the reach and progress for this business.
(*GMV: Gross Merchandise Value)
Total payment volume (TPV) grew 30% year-over-year for the quarter and 58% for the full year over 2019. JumiaPay grew from 15.6% to 25.7% of GMV in the quarter. Transactions grew 10% with orders above 10 euros growing 55%. Jumia also migrated more customers onto JumiaPay to handle their transactions. JumiaPay grew from 29.5% to 33.1% of total orders. Direct integration into the ordering process helped grow adoption of JumiaPay.
The extension of JumiaPay to third parties is very promising. The company added 111 more services in 2020 and now has about 200 services on the platform.
User Growth
Jumia grew active users from 6.1M to 6.8M, a 12% year-over-year increase for Q4. This is relatively low growth in the marketplace of the future in emerging markets.
An analyst on the earnings conference call made an important observation: "…marketing spend in Q4, obviously, it's stepped up versus Q3 as you'd kind of expect to the seasonality. But customer growth didn't increase very significantly" (from the Seeking Alpha transcript). Management explained that marketing spend goes toward a lot more uses than user growth: for example, user retention, order completion or conversions, and consumer education through sales consultants and influencers on using the platform.
Jumia also explained that consumer sentiment remains impacted by the pandemic. Unlike other regions on the globe where adoption of e-commerce accelerated, the pandemic disrupted e-commerce in Jumia's African markets. From the conference call:
"… COVID did not lead to any drastic changes in consumer behavior on our platform nor meaningful surge of volume at pan-African level. Rather, it had net negative effect on the business due to localized supply and logistic disruptions that we have been experiencing throughout the year."
In other words, Jumia Technologies is an investment in the potential for post-pandemic economic acceleration: a reopening trade.
There are also non-pandemic impediments to user growth. A company-sponsored survey showed consumers are not complaining about lack of access to the internet. Instead, they have the typical hesitancies characteristic of an early adoption phase for e-commerce: "… I don't know how to shop, because I don't think products are genuine, or because I cannot check the quality of the products." Jumia insisted it will invest in achieving more user growth. So the marketing spend on consumer education will continue and the big pay-off still sits somewhere out in the future. I want to see accelerating growth once the pandemic is finally over. Unfortunately, slow rollouts of vaccines across the continent means the headwinds from the pandemic will likely stay with Jumia's customers until 2022.
Ghana is the first country to receive a shipment of vaccines from the United Nations-backed COVAX initiative. That shipment just covered 600,000 doses. COVAX only has legally binding contracts for several hundred million shots of vaccine.
Logistics and Advertising
Logistics is a promising new area for Jumia. The company has to overcome a lot of logistic hurdles in getting products to customers like the non-existence of an address or limited storage capacities and capabilities. Based on its success in conquering these challenges, Jumia launched a pilot in Q3 to offer its experience to other African businesses. The company focused on 5 countries and delivered nearly 500K packages for 270 customers. The company shifted revenue from value-added services to fulfillment, so I was not able to get a good read on the specific financial performance of the logistics business. I will look for more clarity in future reports.
Black Friday and the holiday season brought good tidings to Jumia's advertising business. Marketing and advertising revenue increased by 29.9% year-over-year compared to 26.6% from 2019 to 2020. Jumia did business with over 150 advertisers in the quarter.
The Basic Numbers
Jumia made important progress on its strategic profitability and efficiency objectives. EBITDA loss was down to -28.3M euros from -53.4M euros a year ago. Jumia reduced total operating loss by 35% both for the quarter and for the year compared to the prior year. These gains in efficiency came despite a pandemic-driven reduction in overall revenues of 15.3% for Q4 and 12.9% for the full year. Gross profit increased 12.5% for the quarter and 22.3% for the year. Jumia has achieved 5 straight quarters of profitability "after fulfillment at group level." Moreover, the majority of the company's country markets have breakeven numbers before accounting for G&A expenses.
The Trade
I sold weekly $40 puts ahead of earnings to grab risk premium and was prepared to take ownership of shares if the post-earnings response unfolded particularly poorly. With that position closed out, I am now watching the post-earnings reaction to decide on my next move. The most bullish price development would be a rebound above the 50-day moving average (DMA) (the red line in the chart above). If instead, JMIA continues post-earnings selling, I will look for stability around the 2021 low (~$33/share) or at least the uptrending 200DMA (the blue line)(~$22/share).
The range of possibilities is quite wide for JMIA because the stock is very expensive (23x sales according to Yahoo Finance), the risks are high, and yet the upside potential is tremendous. I expect choppy and volatile trading until Jumia Technologies reaches some combination of comprehensive and accelerating growth trends, positive earnings, and/or numerical guidance that clearly quantifies the opportunities sure to come for most of the African countries in Jumia's chosen markets.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in JMIA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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