Pan-African eCommerce giant Jumia (NYSE:JMIA) has a wild ride at the stock market in the past few months. JMIA stock shot up by more than 1500% from its pandemic lows earlier this year. However, in the past three months, it lost roughly 60% of its value.
The reason is simple: its financials do not justify its lofty market capitalization of over $2.5 billion. Though that is true for now, the market is ignoring the business’ positioning and its incredible long-term potential.
Jumia is a company in transition. It has shifted its business model towards third-party marketplace sales, which has heavily impacted its near-term growth. Moreover, it aims to be less reliant on one-off sales such as in electronics towards higher-frequency product categories such as clothing, food, and others.
Additionally, higher-order frequency items will positively impact the penetration of its fintech offering called JumiaPay. It has also implemented several cost control measures and exited less profitable markets such as Cameroon.
This being said, let’s look at Jumia in a little more depth and assess whether it’s a good investment now at this time.
A Look at JMIA’s Financials
It’s safe to that Jumia’s fundamentals aren’t impressive for its massive total addressable market and its meteoric valuation.
Revenues in the past year declined by 12.9% though marketplace revenues grew by 19.6%. Moreover, its gross merchandise volume (GMV) was down by a considerable 19% for the full year. The trend has followed in its first-quarter results this year, where its GMV was down 13% and its sales dropped 6% on a year-over-year basis.
The drop in revenues is linked to its transition in its business model, which I discussed earlier. However, an area where it is excelling is its gross margins.
Gross margins rose by 22.3% last year compared to 2019, reaching positive territory after fulfillment expenses. Moreover, the trend followed in the first quarter this year, where gross profits reached €6.2 million, more than doubling year-over-year.
The number of active users on its platform continues to rise at a healthy rate, experiencing a 12% growth in the past year compared to 2019.
Additionally, the order volume on its platform increased by 5.1% in 2020 compared to 2019. It also increased by 3.3% in the first quarter this year; therefore, it appears that the company is slowly building towards a recovery in its top line.
Market Opportunity
Jumia operates in the fast-growing African market, which has the potential of becoming global growth’s new frontier.
The company operates in 11 countries with 600 million people, which accounts for roughly 70% of Africa’s internet users.
McKinsey estimates that the African eCommerce industry will account for approximately 10% of the continent’s retail sales by 2025, which totals $75 billion in revenues annually.
Hence, it is clear that Jumia has penetrated a small portion of the market so far, and even if it ends up a fraction of its TAM, it could rapidly expand its market capitalization.
In this regard, JMIA stock is fairly priced despite the weakness in its fundamentals. Analysts estimate suggest that it is trading at an 8% discount at this time.
Bottom Line on JMIA Stock
JMIA stock has been on a roller-coaster ride in the past few months. It’s a company in transition, but it appears to be playing its cards right in capturing a meaningful portion of the African eCommerce business.
However, it needs to speed up its top-line growth in the next few quarters to ensure the relevancy of its narrative.
In many ways, though, the pull-back presents an excellent opportunity to invest in the stock, which could have a massive growth runway ahead.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
