Could a change of heart be the catalyst that e-commerce firm Jumia Technologies (NYSE:JMIA) needs to continue reaching higher plateaus? That’s one of the questions that investors of JMIA stock has, now that well-known (or notorious, depending on your perspective) short-seller firm Citron Research recently tweeted that JMIA stock was on its way to $100. You may recall that in 2019, Citron was very much bearish on the company.
In August of that year, Jumia announced that it “fired employees and suspended others after investigations of improper sales practices.” From the Wall Street Journal, Jumia “found instances where independent sales agents and sellers worked with employees to profit from what sellers pay to use the online platform and commissions that sales agents earn. Jumia said it fired several employees and sales agents and removed sellers on the platform who were involved in the scheme.”
Unfortunately, that really played into the narrative that Citron’s Andrew Left had crafted prior to the above incident. Left accused Jumia of fraud and shorted JMIA stock. Since then, shares have been on a downward trek until a series of promising trades eventually materialized into the high thresholds we see now.
Should investors now take the advice of one of the most outspoken short-sellers in the business? Naturally, there are many factors that appear compelling for JMIA stock. First and foremost is the trading sentiment. Yes, Jumia is the beneficiary of a simple argument: Africa is a frontier market for e-commerce, and JMIA is an e-commerce firm. Therefore, the business should be successful.
Essentially, speculators are looking for the next Amazon (NASDAQ:AMZN). It’s possible that JMIA stock could take that mantle for the potentially lucrative African market.
Second, while the company isn’t yet profitable, forward-thinking investors are betting that it will be by becoming the dominant African e-commerce operator. It has a presence in key countries, including Nigeria, Egypt and South Africa and offers a digital payments service. Still, there are some concerns before you dive in.
Africa Is Not an Easy Market for JMIA Stock or Anyone
On the surface, JMIA stock seems like a no-brainer. It wasn’t that long ago that China was mostly rural, agrarian and dare I say it backwards. Suddenly, an economic miracle occurred, sparking unprecedented growth in wealth which early-bird investors benefitted from tremendously. Now, it’s time for a new generation to achieve untold wealth, and hence, Africa.
Certainly, there’s an allure to the ultimate frontier market. Back in the early 2010s decade, legendary commodities investor Jim Rogers was pushing for investing in Angola, even jokingly stating that he and his wife should move there. Personally, I thought it was crazy then and I still think it’s crazy now.
A major reason why the African continent appears to be the perennial frontier market is stability, or lack thereof. JMIA stock is primarily associated with Nigeria, where the underlying company was founded. While the nation is relatively stable, in the context of developed nations, it’s got a long way to go to convince foreign investors to take a shot.
For JMIA stock specifically, the e-commerce business requires a modicum of consumer education. And that’s a huge concern for Nigeria and many other African countries. In 2018, Nigeria’s literacy rate was 62%. To be fair, its southern regions feature high literacy and a relatively tight gap between male and female literacy rates.
However, the northern regions are very problematic. Many of the men are illiterate and the gender gap is atrocious. For instance, in northwestern Nigeria, the male-to-female literacy rate is 59% to 29%. Not surprisingly, terrorist groups have been making inroads into this area, which is not only a headwind for JMIA stock but is also sending chills for African investments in general.
As well, investors should be realistic about the continent’s e-commerce market. In terms of e-commerce readiness, Mauritius is the highest-ranked African country at 58. For context, the U.S. is at number 13.
Investors May Want to Wait
Although I’m tempted to join Left’s sentiment reversal regarding JMIA stock, I’m hesitant. I understand that people want to find the next AMZN, which has been bolstering Jumia shares lately. Recognizing the strength of groupthink, I don’t want to stand in front of this train.
Nevertheless, I think it’s a mistake to assume that all markets eventually have their day in the sun. I also think it’s not appropriate to juxtapose the Chinese economic miracle and apply it haphazardly to any underdeveloped part of the world and expect similar upside. That’s just not how this stuff works.
Curiously, then, the technical picture may be signaling a correction. Since December 2020, the JMIA stock price is rising while the volume has been declining. This suggests a bearish outlook in the nearer term. Given that the fundamentals aren’t particularly enticing, I’m going to sit this one out in case a discount materializes.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
