Africa now has one of the fastest-growing middle classes in the world. Over the last 30 years, the number of middle-class Africans has tripled. Disposable incomes are rising and companies are looking to cash in. But one of the more interesting prospects operating on the continent is e-commerce platform Jumia (NYSE:JMIA). Colloquially, it’s known as Africa’s Amazon (NASDAQ:AMZN). Right now, JMIA stock is on fire, with shares up 394% year-to-date (YTD).
However, concerns surrounding overvaluation are arising and not without reason. Shares are trading at 17.97 times forward enterprise value-to-revenue, while the company’s more famous American counterpart is at 4.6 times. So, Jumia’s revenues are growing, but profitability is still a long way off.
What’s more, e-commerce may be the norm in many parts of the world, but it’s still relatively new to Africa. The continent suffers from weak infrastructure and underdeveloped logistics, two concerns that respective governments are looking to alleviate.
Finally, many understand the opportunity that is on the line here for Africa. That’s why you are seeing several startups and large conglomerates getting in on the action.
So, for all of these reasons, I believe it’s best to keep JMIA stock at a distance.
JMIA Stock Is Still in the Growth Stage
In 2019, JMIA stock debuted on the New York Stock Exchange with great fanfare. One year later and the company remains in its growth stage, burning through a sizeable amount of cash.
Even though Jumia has a trailing 12-month gross profit margin of 60.99%, its net income margin stands at -120.5%. You can blame its massive Selling, General and Administrative (SG&A) spending for this. From the company’s point of view, it has to continue outspending its rivals, who are chomping at the bit for every piece of market share. Plus, the company’s business model is a large one, combining the logistics and e-commerce aspect of Amazon with a payment processing platform similar to Alibaba’s (NYSE:BABA) Alipay.
Hence, bullish investors can make a case that the expenses are warranted. But revenues aren’t growing by a significant margin while costs keep ballooning. And if recent actions are any indication, Jumia understands that it needs to scale down its production. Its footprint in Africa stands at 11 countries, after exiting Rwanda, Cameroon and Tanzania last year.
Co-CEO Sacha Poignonnec has labeled these exits as routine. But on the ground, the situation is different.
Like I mentioned before, JMIA stock is not operating in a vacuum. For instance, it initially had to fend off the threat of Konga, a Nigerian e-commerce company. Early on, the two companies fought to establish dominance in the space, trying to outspend each other to build fulfillment operations normally outsourced to third parties.
By 2018, the battle was over. Konga was purchased in a distressed acquisition. However, the war was far from done.
Now, Alibaba is aggressively expanding into Africa. Additionally, companies like Amazon that are shipping from overseas offer a significant challenge as well. And although Jumia is relatively new, customers aren’t a forgiving lot. Amazon and other retailers generally offer better delivery at lower costs.
However, the company’s JumiaPay fintech platform is perhaps the most attractive growth prospect at this stage. Fintech is the hottest tech sector in Africa. With most payments still made in cash, this is an area where JMIA can get a decent leg up on the competition.
The Infrastructure Problem
The African e-commerce market is forecasted to be worth over $37 billion by 2024. But per capita income on the continent isn’t comparable to that of the U.S. or China yet. Demographics are in their favor, with millions of Africans joining the middle class each year. So, what’s the issue?
Although Africa is growing by leaps and bounds, weak infrastructure is still a major hurdle. Companies like Jumia are navigating these issues. However, unless there is a massive investment in infrastructure in the coming years, it will take a while to harness the market’s potential. Some administrations — such as Rwanda — are doing better than others. But more work is necessary in order for JMIA stock to live up to its fullest.
Jumia Needs To Reflect Fundamental Strength
JMIA stock is certainly an interesting way to play the African growth story. However, the company’s financials do not bail it out. Returns may take a long time to materialize.
Analyst estimates reflect this reality, with the 12-month median price target at $11.84, a nearly 65% discount to the current share price. I would say that this is a fair assessment. At these levels, Jumia can only be justified if you believe it’ll quickly live up to its nickname — Africa’s Amazon.
And as I’ve already mentioned, it’s not like the big fishes will watch from the sidelines if there’s money to be made. So, sell JMIA stock.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.