Until the pandemic stock crash a year ago, Jumia (NYSE:JMIA) was struggling. JMIA stock had been in a horrendous slide from its 2019 highs. In the span of about a year it lost more than 90% of its value. Then the pandemic hit, and like many internet stocks the lock-downs was a massive spark to its business. The stock rebounded sharply and from low to high the rally was 2,600%.
Sadly, February brought about hard selling and it’s now 50% below the highs. Spoiler alert, this is an opportunity to own it for an investment.
Human emotions cause more mistakes than help on Wall Street. Most people are familiar with FOMO (the fear of missing out). Very few realize that the opposite of FOMO is more dangerous. Our human instinct is to chase the herd, which keeps us alive in the wild. If we see a herd of people running out of a building, instinctively we run in the same direction. This is a potential pitfall on Wall Street. Luckily, we can use charts and resist the urge for better investment results. That’s the case now in this stock.
Selling JMIA stock after this correction is more likely capitulating at the wrong time. Smarter stop losses would have been near $60, $55 and again at $50 per share. Remember those levels because they will be important later during the rebound.
The timing of the rally is tricky since there are no bells for it. Ideally it should be a process. V-shape bounces are fun but they don’t establish a strong wide base. Rounding the bottom would have stronger and more sustaining support for the bulls.
Why JMIA Stock Spiked
The commerce migration from Main Street foot traffic to e-traffic was a mad rush last year. The action on Wall Street in internet stocks was even crazier. Even stocks as big as Amazon (NASDAQ:AMZN) doubled. Effectively, the pandemic gave the digital revolution a tailwind of epic proportions. People all over the world had no choice but to shop online. Most of these will morph into ongoing habits and not just a fad. E-commerce has never been more ubiquitous.
The success of Amazon over the past decade is testament to the viability of the business model. The internet convenience is no longer the future because it is the present and ongoing. They blazed the trail and now companies like this are walking through it. Jumia has that opportunity in Africa where it’s a still very young market. They have the blueprint from AMZN so they don’t have to reinvent the wheel. It’s easier to establish a successful business in a new market than to build a foreign idea from scratch.
This is not to say it will be a slam-dunk success just because others have done it. Management will need to execute well. There are no reasons to doubt them yet. The point is that the upside opportunities are on lower branches than the trend-setters. Stocks that move this fast don’t allow for easy or obvious entries. In December, I shared the upside opportunity and it played out well. This dip could be its second coming.
Why Jumia Will Bounce back
The future looks bright for them because Africa is in the earlier stages of internet ubiquity. The world is also adapting to 5G, which should in theory require less infrastructure. This will go a long way toward accelerating Jumia’s revenue power. When sales come, the profits will eventually follow.
Technically, the price action also will provide JMIA stock some support now. The correction last week brought it to the contention levels from November. This is important because often these are where buyers show up. The stock price will eventually make sense for more and more investors, and a bottom will form. Any one who wished they owned into the stock when it was spiking into $60 per share should love it here. Nothing changed in their future prospects except sentiment.
The caveat in the meanwhile is what happens in the stock market in general. Regardless of how great is the individual cases, stocks have to trade inside the collective on Wall Street. JMIA stock cannot rally on its own so it will need this bull market to continue. To leave room for error, I would consider selling JMIA put instead of buying shares outright.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.