What’s next for once hot, now not so hot Jumia Technologies (NYSE:JMIA) stock? The company, which aspires to be the Amazon (NASDAQ:AMZN) of Africa, went parabolic during the summer. But, after bad results in August, shares have cratered back to single-digits.
No surprises here. During its epic run, investors bought on the headlines, not on the details. Given it’ll take years for Jumia to reach success, it makes sense speculators decided to cash out.
But, while short-term prospects remain unclear, at today’s prices shares may be a worthwhile bet on eCommerce growth in some of the world’s largest emerging markets.
How so? Firstly, with this company focused 100% on Africa, Jumia could lock down significant share in markets names like Amazon have yet to enter. Secondly, its shift from direct sales to a marketplace model will reduce cash burn, and could provide a clearer path to profitability.
Thirdly, heavy short interest means decent chances of a squeeze. Granted, I wouldn’t buy this on short squeeze odds alone. But, with this factor in play, just a bit of good news could send shares soaring yet again.
In short, with all three positives in mind, a small position at today’s prices may be worthwhile.
JMIA Stock, Recent Results, and A Long Road Ahead
Jumia shares started heading south last month, after its disappointing earnings release. For the quarter ending Jun 30, gross merchandise value (GMV) fell 13.2% from the prior year’s quarter.
Yet, as this commentator noted, that was to be expected. With the shift from direct sales to marketplace, this metric was set to decline. In fact, with sales down 10%, versus consensus of a 20% decline, results came in better than expected.
Beyond the top-level decline were a few bits of good news. Marketplace revenues soared 38.2% year-over-year. And, with higher gross margins, operating losses narrowed 43.6%. But, despite the improved performance, cash burn remains high with Jumia. Assuming operating losses stay the same, or improve, the company only has enough cash to keep the lights on for a year.
Given it could take years for the company to reach profitability, chances are it’ll have to raise more capital. And with more capital raises comes dilution. Sure, dilutive stock sales are part-and-parcel with many development-stage companies. Yet, said dilution could reduce potential gains for investors buying shares today.
But, that’s not the only reason why diving in today remains risky. A long time horizon is another negative to consider.
It Could Take Years For Jumia to Become an “Overnight Success”
Without the heavy competition seen in developed markets, Jumia could strike gold focusing on Africa’s emerging and frontier markets. The only problem? Don’t expect overnight success. As our own David Moadel discussed in his Sep 9 article on JMIA stock, this company may be too early for prime time.
How so? With internet penetration far below 50%, it’s going to take time for eCommerce to take off in Africa. Granted, according to Statista, internet penetration in Nigeria (Africa’s largest economy) will rise to over 65% by 2025.
Yet, as seen from the eCommerce sector’s challenges in South Africa, Jumia has its work cut out for it, even in more developed African economies. Infrastructure headwinds are part of the reason why established eCommerce names like Amazon have avoided that market.
InvestorPlace’s Ian Bezek, who holds a less bearish view of JMIA stock, also sees time horizon as a concern. Citing the fact it took South American eCommerce play MercadoLibre (NASDAQ:MELI) nearly a decade to hit success, the same situation could play out here.
So, why buy today, when your investment could be “dead money” for as long as a decade? With shares beaten down by lackluster results, entering a position at today’s prices could still produce solid returns in the next year.
How so? All the company needs is just a breadcrumb of good news. Jumia isn’t a crowded trade among bulls. But it is among the bears. As of Aug 31, 16.7% of shares had been sold short. If next quarter shows improved sales volume and/or narrowed losses, shares could see a near-term boost, as shorts scramble to exit positions.
Perhaps not back to prior highs (just below $24 per share). But, maybe to prices well above where the stock trades today (around $8.27 per share).
Tread Carefully, But There’s Still Opportunity Here
As seen from recent results, it’s clear Jumia remains a work in progress. With eCommerce in Africa still in the early stages, and the company’s heavy cash burn, investors buying into shares today should be prepared for high volatility.
That being said, after the August sell-off, the odds may be more in your favor now than before with long-shot JMIA stock. Don’t bet the ranch, but there’s still opportunity here.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, contributor to InvestorPlace, has written single stock analysis since 2016.
