Slimoche
Shares of Jumia Technologies AG (NYSE:JMIA) spiked in the double digits following the release of Q1 results on Tuesday. While things are certainly moving in the right direction business wise, I believe that the market now values the company too optimistically. Below, I will dissect the recent results and explain my thesis.
Overview
As Jumia may not be a household name, allow me to give you a short introduction. The company operates a pan-African e-commerce and logistics platform across 11 countries on the continent. By far, its most important individual market is Nigeria, followed by Egypt. They also operate a digital payment service under the JumiaPay brand. I am generally not a big fan of describing a business as “the Amazon of [insert market]” but in this case, the Amazon of Africa might be a reasonably fitting description.
Financials
Q1 were quite positive overall. Jumia reports a quarterly operating loss of $8 million– a massive improvement from 28 million during Q1 of 2023. Revenue increased 19 percent YoY to now $49 million. Constant currency revenue increased by a much more impressive 57 percent. At the same time, the company cut expenses across the board. Q1 fulfillment expenses were down 21 percent YoY, although it should be noted that this to a good degree a result of currency effects (up 5 percent on a constant currency basis). Similarly, advertising expenses reduced by nearly a third, but slightly grew in local currencies. Technology related expenses decreased to $9.1 million (-19 percent; -17 percent on a constant currency basis). Administrative cost was slashed even more impressively by 31 percent (18 percent on a constant currency basis). These developments can be attributed in large part to a conscious decision to streamline operations. So, all in all, the business is moving in the right direction. Interest expenses are still moderate, at a mere $0.8 million (although it should be noted that the company did, in fact, generate interest income in the past). Liquidity as of March 31st was $101 million. Under normal circumstances, that should suffice to keep the business afloat for at least around one and a half year, give or take, even anticipating continued cash burn.
Currency Risk
So, what makes me cautious about Jumia then? The company’s biggest problem is currency devaluation. A quarterly foreign exchange loss of $13.3 million underlines this. This has a lot to do with Jumia’s corporate structure. Despite its business being focused on Africa, the company is headquartered in Dublin, Ireland and incorporated in Germany. Meanwhile, significant development work is done out of Portugal. Unsurprisingly, as a NYSE listed business, reporting currency is USD. So, while revenue occurs almost entirely in local currencies like the Nigerian Naira or Egyptian Pound, a good share of expenses are owed in Euro. Under these circumstances, rising interest rates in developed economies paired with political and economic instability in several of Jumia’s African markets do not bode well. With a structure like this, there are factors beyond Jumia’s control that may determine whether there is a path to breakeven, regardless of operational success.
Small Pond Effect
There is also one more general consideration: if and once African markets grow to a certain size, I believe it to be quite likely that global players the likes of Amazon (AMZN) or Alibaba (BABA) might move into them in force. Those companies have far deeper pockets than Jumia does, and might thereby outright crush them. It is, in my opinion, a probability that this stage of development would coincide with the point in time at which Jumia may begin to see sustainable profitability.
Conclusion
All in all, I believe that positive developments are more than priced in at the current share price. Given Jumia’s corporate structure and the markets it operates in, breakeven is not guaranteed, even taking operational success for granted. Nigeria’s political stability is fragile, which entails significant economic risk as well. Egypt is politically stable, but the economy is weakened and disproportionately affected by the fallout from the war in neighboring Gaza (especially the reduction in Red Sea traffic). Both those countries are also notoriously corruption ridden, which generally tends to be bad for business. In addition, I would expect eventual success to only attract far more powerful competitors.
In my opinion, an investment should ultimately be valued on (future) profits. The lack of predictability with regard to profits presents an obvious problem in this regard. With Jumia, the next best measure for the time being would be sales – and these, too, are volatile due to currency movements. At a valuation of around 3 times forward sales (subject to currency movements), and with no clear path to predictable reporting currency profits, I therefore find the risk profile to be unappealing. I am, therefore, rating JMIA stock a sell for the time being.
