Investors who got caught up chasing Jumia Technologies (NYSE:JMIA) last month will feel the pain. JMIA stock peaked at $23.90, though it spent more time in the high teens before shares collapsed.
The first question investors should ask is why the market is dumping this internet retail stock.
With a downtrend firmly in place, JMIA stock is at risk of trading back to the $5 zone.
What happens next?
JMIA Stock Faces Steep Selling Pressure
On Aug. 12, Jumia reported the second-quarter 2020 results. The African e-commerce marketplace firm posted gross merchandise volume (“GMV”) falling. This is due partly to a business mix shift. GMV fell 13% year-on-year to EUR 228 million, hurt by a contraction in phone sales. The company warned this GMV decline will continue for the rest of the year. Adjusted EBITDA fell 26% to EUR 32.9 million.
The quarterly press release does not reveal the true reason for the weakness. Jumia has too many third-party sellers dropshipping low-quality goods from China through Alibaba’s (NYSE:BABA) AliExpress. Losing customers by selling junk will hurt Jumia’s credibility and business. Jumia should cut out the middle layer and invest directly in first-party businesses. If it did so, it would become a pure-play online retailer. If management has no control of product quality, the business will continue weakening.
Jumia’s weak forecast suggests that the business model will not change. This is a red flag that should scare off potential Jumia investors. Chances are high that the company will post another weak quarter and full-year report.
Second Quarter Highlights
Jumia posted modest improvements in Q2. Adjusted EBITDA loss fell slightly, by 10% in Q1. In Q2, losses shrank by 26% to negative $32.9 million (as shown in slide 3). The company highlighted its acceleration and enhancement in partnership with brands across Africa. This includes Nigerian Breweries, Carrefour, and Henkel.
Transactions improved modestly in Q2. Usage topped 6.8 million annual active customers. But Y/Y orders grew by only 8%. JumiaPay’s year-on-year total payment volume of 38% is promising. As cost efficiencies increase, Jumia may achieve profitability, eventually.
On its conference call, Co-Founder and Co-Chief Executive Officer Sacha Poignonnec said that gross profit after fulfillment is achievable. The executive pointed to its existing monetization stream and expects new ones ahead.
For example, the company did not spend much on advertising and marketing. So, after its customers learn about marketplaces by word of mouth, it may start promoting the service.
Jumia Express hardly started monetizing. First, it needs to build a relationship with its existing sellers. Then, it may start realizing new revenue streams.
Jumia is still in the early phases of potential profits. The CEO said, “it’s very important to be attractive to the sellers and in our history every now and then, we went on and increased commissions. And most of the time when we did that the sellers was completely fine with it.”
Jumia suppliers are passing increased costs to customers, hurting sales. The monetization strategy cannot rely on commission alone. So, by introducing more streams, the company may find better ways to monetize its platform. And as revenues climb, the stock may end its month-long decline.
Price Target and Your Takeaway
Three analysts who cover the stock have an average price target of $12.83 (per Tipranks). With two of the three ratings a “hold,” the 55.70% upside target is hardly convincing. Conversely, the stock has an overall score of 10/100:
As shown, Jumia has a 69/100 on momentum, due entirely to the recent run-up. That buying momentum faded. So, catching the proverbial falling knife may prove fatal for the novice investor.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.