Jumia Technologies (NYSE:JMIA) is likely still a key participant in the future of commerce in many African countries. However, the pandemic created a different path than the one experienced by retailers in countries like the United States. According to Jumia, the pandemic in its markets did not create a big tailwind migrating customer buying habits to digital modalities. As a result, Jumia has had to apply extra effort to catalyze digital transformation. That effort now appears in the form of a big spending ramp on sales and marketing.
For example, management provided the following explanation in the Q&A portion of the earnings conference call. From the Seeking Alpha transcript (emphasis mine):
“if you think about the brands that is needed in the market where consumers have never or almost never transacted online, the amount of brand equity that you need to create to be able to trust the users to transact for the first-time online is something that takes a lot of time, a lot of money, a lot of efforts, and a lot of localization.”
In its Q3 earnings report, Jumia discussed the beginning of a third phase of business investment called “Scaling the Platform.” In this phase, Jumia listed “accelerating usage growth, JumiaPay development, diversifying monetization, progress towards profitability” as key activities. These aspirations come with a hefty price tag; spending is a key element driving this phase. Jumia nearly doubled its EBIDTA loss year-over-year from -$27M to -$52.5 in what it calls “investments in the long-term growth of the business.” The biggest portion of the increase came from $16.7M in sales & advertising expense. All this spending generated 28% year-over-year order growth (11% over Q2) but meager customer growth of 8% year-over-year (4% over Q2). Moreover, Gross Merchandise Value (GMV) lagged order growth with an 8% year-over-year gain (7% over Q2). Investors were clearly displeased with the current returns on this spending.
The downtrend in place since the February all-time highs earned an exclamation mark in the form of a 19.2% post-earnings loss and follow-on selling.
The lagging GMV growth is by design as Jumia continues to encourage customers to purchase small ticket, everyday items. Accordingly, for example, average order value fell from $41.50 in Q3 2019 to $33.20 in Q3 2020 to $28.00 in the latest quarter. Because customer growth is low, Jumia appears to be working hard for little. The 8.5 million in orders for Q3 are an all-time high with the fastest annual growth in 7 quarters. However, Jumia needs to scale unit counts much higher. From Jumia’s investor presentation:
Jumia calls the recent surge “clear signs of growth acceleration.” A better descriptor would be “early signs of growth acceleration.”
Analysts on the conference call pressed Jumia management for perspective and guidance on the volume of spending and the expected returns. Management made it clear it is very comfortable with the current plans for increasing spending for the foreseeable future (emphasis mine):
“…we would be very comfortable continuing to increase the absolute dollars that we are investing in market team, if that makes sense. So, we’ll have to navigate based on how the efficiency evolving. And as the efficiency evolves, we will allocate more dollars, right? So, I think it’s an equation here that we are solving for and that over time, what I can say is that we want to increase the absolute dollars that we invest and we want to see also the efficiency increasing.”
Jumia Pay is one of the several services that holds out the promise of more revenue growth and profitability. Year-over-year penetration only increased to 35.4% from 27.1% a year ago. The share of total orders is even more telling about the work ahead: a meager 34.1% to 35.7%. Hopefully, Jumia Pay is not reaching some kind of plateau that will require attacking with accelerated marketing spend.
At least the Logistics business continues to demonstrate a lot of upside potential:
“Our newly launched offering of logistics services to third parties is experiencing very strong momentum, posting yet another volume record reaching 2.9 million packages shipped during the third quarter of 2021, more than doubling quarter-on-quarter, on behalf of 766 clients. The business reached a major milestone in the third quarter of 2021, with quarterly revenue generated from this activity reaching $1 million.”
The two months going into earnings were hopeful thanks to a significant purchase of 50,000 ADS shares by co-CEO Jeremy Hodara. In hindsight, the lack of follow-on upward momentum was a warning sign of potential disappointment. So what’s next with JMIA currently trading at a 52-week low?
From a pure technical standpoint, JMIA has additional downside risk to fill the gap down from last November’s earnings. On that day, JMIA imploded 19.3% to close at $12.87. Buyers stepped right in the next day and never looked back. This time around, JMIA gapped down and lost the same percentage but has yet to bottom. Since I already have a position, I am mainly interested in adding more after JMIA reverses all its Q3 2021 losses. Such a move would indicate renewed buying interest. On the downside, I consider a sell-off to single digits to be sufficiently derisked to make bottom-fishing worthwhile.
I can exercise patience because I built a buffer from trading around JMIA as it moved from a post-pandemic disaster to a hot stock. More importantly, I want to have a piece of JMIA whenever the time comes that the company emerges successful on the other side of this “Scaling the Platform” phase.
I conclude with this telling quote from the Q&A in the earnings conference call. Management liberally sprinkled the word “accelerate” throughout the discussion so at one point they had to find a new form of emphasis. From the Seeking Alpha transcript:
“But I think we’ll have to see how Q4 is playing out, but again, we’re very confident about accelerating the acceleration.”
Be careful out there!
This article was written by
Disclosure: I/we have a beneficial long position in the shares of JMIA either through stock ownership, options, or other derivatives. 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.