Jumia Technologies (NYSE:JMIA) stock is plunging at the moment. A 10%-plus pullback on Monday leaves shares of the African e-commerce platform down over 25% from all-time highs reached less than two weeks ago.
The pullback makes some sense. After all, JMIA stock had posted a parabolic rally from early October levels around $8 to those highs, gaining more than 500% in the process. It’s a rally that didn’t seem to make a ton of sense.
Third quarter earnings in November were far from impressive. Jumia didn’t get the pandemic-driven bounce seen by e-commerce names elsewhere. The stock at $8 wasn’t exactly cheap; at $49, valuation looked close to ridiculous.
Back at $36, the concerns still hold. There are plenty of reasons to sell, and personally I’d let this plunge continue to play out. All that said, from a long-term perspective, there is one intriguing reason to at the least keep a close eye on Jumia stock.
Ugly Fundamentals
This is, and has been, a market willing to pay huge multiples of revenue for unprofitable companies. But even by that high standard, Jumia’s fundamentals truly stand out, and not in a good way.
Simply put, this is an ugly business right now. In the third quarter, GMV (gross merchandise value, or the total value of merchandise shipped through the platform) declined 28% year-over-year. That’s with the benefit of the pandemic, which has boosted e-commerce businesses worldwide.
To be fair, there were some one-time factors at play. Jumia pulled back sharply on its own sales, as it tries to shift its focus to a marketplace model. But 19% growth in Marketplace revenue hardly suggests the company is driving growth in Africa the way bulls believe it should.
That revenue badly disappointed, and in fact led JMIA stock to plunge 25% in two sessions in November. But in one sense, the top-line shortfall is a positive, because it limited Jumia’s losses.
This, after all, is a company that posted an operating loss of nearly 70 cents per dollar of revenue. Incredibly, in the third quarter, Jumia lost 3.4 EUR on the average order, even on an Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) basis.
It bears repeating: this is an ugly business right now, with massive losses and disappointing growth.
JMIA Stock Is Far From Cheap
Yet JMIA stock is far from cheap. JMIA trades at about 16x trailing twelve-month revenue.
That’s not necessarily a huge multiple in this market, but this is not a software company. It’s a retailer with low profit margins. Unlike giants like Amazon.com (NASDAQ:AMZN) or Alibaba (NYSE:BABA), it doesn’t have a high-margin cloud business, either.
In that context, the 16x multiple is a massive outlier. Wayfair (NYSE:W), often derided as something close to a bubble stock, trades at 1.8x sales. Overstock.com (NASDAQ:OSTK) sits at almost exactly 1x. JD.com (NASDAQ:JD), which does have some higher-margin offerings in logistics and elsewhere, is at 1.3x.
At least on a price-to-revenue basis, JMIA’s multiple is roughly ten times that of more established e-commerce plays. Put another way, there is a reasonable fundamental case that JMIA stock should trade at $3.60, not $36.
To be clear, that case is a bit too simplistic, and I personally don’t believe the stock is worth $4 per share. But the broad point is what matters. This is a business that at the moment is nowhere close to profitability, with a valuation that far outpaces essentially any other company in its sector. That combination usually underpins a case to short a stock, not to own it.
And Yet…
Indeed, I’d recommend against JMIA stock at this point. The valuation is simply too high. The gains from October seem due more to a massive rally in small-caps than any real fundamental change in the business.
But it’s worth highlighting that qualifier: “at this point.” It’s the same qualifier that needs to be applied to the Jumia business as well.
Jumia isn’t necessarily unprofitable because its management is terrible, or because its strategy is misguided. There’s a structural problem at play here. Africa likely does not yet have the infrastructure to support an e-commerce winner.
There’s a staggering figure in the third quarter report. 23% of Jumia’s GMV wound up being canceled, returned, or facing a failed delivery. To put that figure in context, Amazon’s allowance for returns in 2019 was $1.8 billion, or about 1.8% of gross revenue. Those figures aren’t apples-to-apples, but it’s obvious that it’s difficult to run an e-commerce business when nearly a quarter of orders fall through for one reason or another.
The 23% number is getting better, and will further improve. Africa is growing, and its infrastructure will improve as well.
And so the case for JMIA stock from a long-term perspective is that, yes, the business is ugly right now, but there’s really no other choice. The conditions may not be there for profitability (or anything close) at the moment. In the meantime, Jumia can build out its presence, pick up customers, and improve its operations.
That’s not a case I’m sold on, particularly at 16x sales. But it is the case for JMIA stock at a more reasonable price. At this point, JMIA frankly looks like one of the most unattractive stocks in the market. What comes after this point, however, could be far more intriguing.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
