After reacting badly to the weak quarterly earnings, Jumia Technologies (NYSE:JMIA) roared right back. JMIA stock rose by 68.41% in the last week, closing at a 52-week high.
Despite posting a drop in gross merchandise volume, losses narrowed considerably.
What should investors do after missing the dip in Jumia?
Jumia posted gross profit rising by 22%, operating loss falling by 49%, and total payment volume rising by 50%. Its adjusted EBITDA of $22.7 million is an improvement from the $54.6 million loss last year. The company cut expenses, especially in sales and advertising, share-based compensation, and general and administrative expenses.
Now that it established itself as the leading pan-African e-commerce platform, Jumia’s next priority is operating at break-even.
“The significant progress achieved was mostly attributable to the thorough work we have done on the fundamentals of our business, with limited support from external factors such as COVID-19,” Co-CEOs Jeremy Hodara and Sacha Poignonnec said in a joint statement. “The business mix re-balancing initiated late last year has increased our exposure to everyday product categories and, combined with enhanced promotional discipline, supported unit economics.”
A Closer Look at JMIA Stock
Jumia’s financial strategy depends on four things: growing profitably, finding cost efficiencies, developing JumiaPay, and diversifying its business. It cut SG&A costs by exiting three countries, simplifying its organization structure, and exiting the travel vertical (per slide 4).
Unit economics are improving. Gross profit per order rose by 29% to EUR 3.5. Now that orders are more profitable, the established user base and higher ordering volume will start paying off. It established itself as the destination of choice for brands in Africa. For example, Jumia on-boarded over 60 brands.
When it hosted the Jumia Brand Festival in September, lots of big companies participated. So the more customers that join and the more companies that participate, the bigger its platform gets.
JumiaPay is a potential growth driver for the company in the coming quarters. Investor appetite for e-payment services continues to grow. StoneCo (NASDAQ:STNE) closed at an all-time high last week. PayPal (NASDAQ:PYPL) is up 78% year-to-date.
Growth, Cash Flow and JMIA Stock
Jumia’s JumiaPay transactions accounted for 34% of total orders. 90% of the transactions were over €10. Furthermore, total payment volume rose by 50%, while the on-platform penetration topped 26%.
Reaching profitability will not take much for the company. As the adoption of e-commerce in Africa increases, it will not even need to rely on monetizing JumiaPay.
Co-CEO Sacha Poignonnec said that it is not making any money yet on payment service provider activities, claiming “there’s a lot that we are going to do to increase revenues even with the same size of the business.”
Based on the cash flow the company is expected to generate in the future, simplywall.st set a downside fair value of $8.96. From the few analysts with a price target, the average price target is $13.00 (per Tipranks).
The bullish investor may build a 5-year discounted cash flow revenue exit model to come up with a fair value. With the following metrics below, the implied fair value is around $30.00.
|Discount Rate||10.5% – 9.0%||10.00%|
|Terminal Revenue Multiple||2.4x – 3.4x||2.9x|
|Fair Value||$24.17 – $36||$29.64|
|Upside||-2.6% – 45%||19.40%|
Once Jumia starts posting more consistent revenue, investors may click on the finbox link above to lower the discount rate and increase the terminal revenue multiple.
Momentum investors should continue holding Jumia after its stock surge but sell it if profit-takers pressure the share price. Those who missed the rally will want to wait for a better entry price. The company needs to grow GMV and post profits. When it does, then the stock will continue climbing to new highs.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.