It’s easy to pigeonhole Jumia Technologies (NYSE:JMIA) as the African analogue to highly successful e-commerce companies like America’s Amazon (NASADQ:AMZN) and China’s Alibaba (NYSE:BABA). That comparison could prompt traders to load up on JMIA stock without due consideration.
I wouldn’t dare to suggest that you short-sell JMIA stock as e-commerce is indubitably a growth market in 2020. The onset of the novel coronavirus certainly bolstered the online marketplace as a whole as more consumers opted to shop from home this year.
Moreover, I respect the idea of broadening our horizons and considering investments in geographies far and wide. And surely there are Africa-based companies that deserve our attention and investment capital.
My chief concern is that amateur traders (also known as the Robinhood crowd) will latch on to JMIA stock without doing their due diligence. Perhaps they’ll speculate that Jumia will be the next Amazon or Alibaba. To them I say, it’s not irrational to go international, but there’s a better use for your capital.
A Closer Look at JMIA Stock
I hate to report this, but JMIA stock presents a textbook example of a pop and drop. Or more accurately, two pops and drops.
The first share-price spike took place during April and May of last year. In that time frame, the JMIA stock price jumped from $25 and change to the the $48 region. A precipitous drop ensued soon afterwards, however.
By March of this year, JMIA stock had fallen to a gut-wrenching low of $2.15. Yet, a second shot of hope fuel arrived during the following months as JMIA shares surged, reaching $21 in early August.
Unfortunately, that ascent was short-lived, much like the first one. By Aug. 4, the JMIA stock price had tumbled to $8.47 with no sign of a rebound in sight. Furthermore, the daily trading volume had declined considerably after the Aug. 4 peak.
Not Quite Ready for E-Commerce
Warren Buffett once famously quipped that his favorite hold time for stocks is forever. I suppose it’s possible that Africa will have a bustling e-commerce market eventually. Therefore, it could make sense to buy JMIA stock today if you’re planning to hold it for decades.
Many of us probably have a shorter time frame than “forever,” though. Thus, it’s essential to consider the outlook for e-commerce in Africa. After all, that’s where Jumia’s business interests are located, even though the company is actually based in Germany.
I have to give InvestorPlace contributor Luke Lango credit for his concise summary of the situation in Africa. As he put it, “Africa isn’t quite ready for an e-commerce boom.”
A fairly recent estimate puts Africa’s Internet penetration rate at 42.2%. That might sound pretty good, we have to compare it to other nations to gauge it properly. And compared to North America’s 90.3% and Europe’s 87.2%, we can put Africa’s low Internet penetration rate in perspective.
No Covid-19 Jolt
During the run-up to Jumia’s second-quarter earnings report, investors may have presumed a boost in e-commerce activity following the onset of Covid-19. In addition, they probably anticipated that the e-commerce boost would give Jumia’s quarterly revenues a jolt.
That anticipation would account for the pop in the JMIA stock price. And, the disappointment that followed appears to have induced a post-earnings share-price drop.
As it turns out, Jumia announced a quarterly decline in revenues of 10%. If there’s anything that the market hates, it’s a negative surprise. Consequently, the trading community punished JMIA stock and its owners, sending the share price down 28% soon after the earnings release.
The Bottom Line
It’s perfectly understandable that traders want to find the next Amazon or Alibaba. Also, there’s nothing wrong with broadening one’s geographic horizons in the search for good stocks to buy.
However, JMIA stock doesn’t appear to be the right place to park your investment capital. The e-commerce revolution is global, sure, but it could take a long time for that revolution to benefit Jumia’s shareholders.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
