Jumia: Positive Outlook, But Appears Fully Valued Today (NYSE:JMIA)

Jumia (NYSE:JMIA) is an e-commerce company focusing on the Pan-African market, founded in 2012. Since a few years ago, it has also made an expansion into logistics and payment businesses. The company generates the majority of its revenue from the operations in West and North Africa. As per its 20F, JMIA serves 11 countries in Africa today.

I have covered JMIA twice before, first in 2020, and the latest one in May last year. I rated the stock neutral at both occasions, given the lack of visibility for an overall rebound amid the challenging situation at the time.

In fact, over the past five years, the journey has been quite volatile. This includes JMIA exiting some tougher-than-expected countries in Africa, optimizing its cost structures, and also changing its CEO. Nonetheless, JMIA appears to have found its tipping point as of late under the new leadership. Share price has more than doubled over the past year. JMIA is currently trading at $6.45 per share, also up over 90% YTD.

I maintain my neutral rating. My 1-year price target of $6.4 per share suggests that JMIA may have been fully valued today. JMIA’s relatively strong Q1 performance may have created positive market reaction YTD, as demonstrated by the stock being up 90% YTD. But it seems that a lot of the upside could have been priced in.

Financial Reviews

Though fundamentals are still underwhelming overall, it seems that the significant improvements across profitability and operating cash flow (OCF) as of late have been sufficient to unlock a positive market sentiment, as demonstrated by the doubling share price within the same period.

In Q1, JMIA maintained such positive trends across all of its key metrics. In Q1, JMIA delivered a revenue of almost $49 million, an 18.5% YoY growth. However, JMIA not only delivered double-digit growth but also further significant profitability improvements. Adjusted EBITDA and operating losses continued to narrow. Adjusted EBITDA, for instance, went from over -$24 million in Q1 last year to merely -$4.3 million this Q1. With operating loss also pretty much narrowing at the same magnitude, JMIA may potentially reach an operating breakeven in the next one or two quarters. Most importantly, the strong bottom-line performance here also resulted in JMIA finally achieving its first OCF-positive quarter in its history. In Q1, JMIA delivered $4 million of OCF.

With OCF trending positively, JMIA should also be in a good position to maintain a strong liquidity position into the FY. In Q1 alone, JMIA already saw a softer -$19 million decrease in liquidity compared to -$22 million same time last year. Moreover, liquidity decrease could have been even lower by -$5.9 million had JMIA not seen non-operational currency devaluation issues in Egypt and Nigeria. JMIA ended the quarter with $101.5 million of liquidity.

Catalyst

Into FY 2024, I believe JMIA should be in relatively good position to continue reducing cash usage to improve its liquidity position, all while maintaining respectable top-line growth.

In my opinion, one of the key areas to drive overall margin expansions would be the potentially stronger profitability outlook across the whole first-party and marketplace businesses, driven by logistics cost optimizations in the key markets like Nigeria through footprint expansions, as commented by the management in Q1 earnings call:

Today, roughly 51% of our orders are outside capital cities versus 48% a year ago. For example, in Nigeria, we are revamping our logistics capabilities to reach even more cities with shorter lead times and at a lower cost. Our network of Boots on the Ground agents known as JForce is a key asset to this expansion efforts. By serving as an intermediary between customers and Jumia, our JForce is a key enabler of e-commerce adoption.

Source: Q1 earnings call

One more positive thing, aside from the fact that JMIA’s management has already identified the specific area to focus on, would be the still significant room for more upside for cost reductions, in my opinion. For instance, while JMIA does not break down its cost of revenue by functions, it still trended slightly higher in Q1 despite the fulfillment revenue being down -25% YoY.

Meanwhile, fulfillment expenses, which is part of logistics expense recorded outside cost of revenue, still seems to remain elevated compared to other operating expenses in Q1. On currency neutral basis, it even saw a 5% YoY increase in Q1.

Of course, I would expect the cost optimization initiative in logistics to also happen in parallel to the continued focus on more selective product assortment and on promotional scale-backs. Sales and advertising expense, for instance, still saw a slight uptick on currency neutral basis in Q1. Nonetheless, the fact that key operating expenses as a whole already saw considerable improvements while orders growth remaining steady in key markets suggests that JMIA may maintain the trend into FY 2024, effectively driving less usage of cash.

Risk

Prolonging currency instabilities in Egypt and Nigeria may continue to put downward pressure on profitability. For instance, the adjusted EBITDA loss would have narrowed by more than a third of the reported figure on a currency-neutral basis in Q1. Despite the management’s comment on the potential signs of improvements in the macro situations in these countries, I believe the overall outlook could still remain unpredictable.

In a less ideal scenario, the persisting and even worsening macro challenge here may also deter JMIA to continue its logistics network optimization efforts through footprint expansion, especially in Nigeria. This effectively may delay operating breakeven, in my opinion.

Valuation/Pricing

My target price for JMIA is driven by the following assumptions for the bull vs. bear scenarios of the FY 2024 projection:

1. Bull scenario (50% probability) assumptions – I expect revenue to grow 1.8% YoY to $190 million, in line with the market’s estimate. I assume forward P/S to expand slightly to 3.8x, implying a share price appreciation to $7.

2. Bear scenario (50% probability) assumptions – JMIA to deliver FY 2024 revenue of $188 million, a 0.75% YoY growth, in line with the market’s estimate. Given the positive growth rate, P/S to also possibly trend higher towards 3x. This still would not be enough to avoid correction to $5.6 price level, however.

Consolidating all the information above into my model, I arrived at an FY 2024 weighted target price of $6.4 per share, suggesting that JMIA is fully valued today. I would maintain my neutral rating.

My 50-50 bull-bear probability is based on my belief that JMIA will emphasize more focus towards profitability and cash flow improvement in FY 2024, making revenue growth relatively unpredictable, especially amid the lingering macro challenges in Nigeria. I would also note that despite the positive improvements in Q1, the share price has also appreciated quite a lot YTD, suggesting that much of the upside here may have already been priced in.

Conclusion

JMIA is a leading player in the Pan-African e-commerce market. However, JMIA’s journey has been full of ups and downs due to the overall challenges in doing business in Africa. As of late, however, JMIA seems to have found the right strategy to deliver profitable growth. I expect stronger profitability and cash flow improvements in FY 2024, though the lingering macro challenges could also present headwinds. Markets have reacted positively toward JMIA’s improvements in Q1, as demonstrated by the over 90% price appreciation YTD. Based on my 1-year $6.4 price target, which is the level where JMIA is trading at today, I believe much of the upsides may have already been priced in. I maintain my neutral rating for the stock.