Shareholders of Jumia Technology (NASDAQ:JMIA) stock have had a rough few months. The stock has been on a downtrend since March. Unfortunately, holders of JMIA stock that are hoping for a reversal of fortune may have to wait a bit longer.
Jumia recently released its second quarter results and investors were not particularly impressed. This resulted in JMIA stock trading down 4.3% upon earnings release. The company was able to beat earnings expectations by 3 cents per share, yet missed revenue expectations by $3.1 million.
Despite missing expectations, revenues grew by a modest 4.6% year over year to $40.2 million. Given the circumstances of the pandemic, this isn’t too bad.
However, for a company that is trading at “high-growth” valuation multiples, missing revenue expectations is a big no-no. This potentially signals a weakness in a company’s business model that will prevent it from scaling as fast as investors need.
The bearish sentiment on JMIA stock will continue given the revenue miss. However, a lot of this bad news is already baked in. JMIA stock once traded at a high of $65. It has now tested the support level of $18 twice and is trading at approximately $20. This price level is still way below the stock’s 200-day moving average of $35.
Typically, if a stock trading much lower than the moving average, it will continue to test its support level. This is especially true in the context of Jumia missing Wall Street’s revenue forecasts. Given the continued bearish sentiment, I want to examine the company’s actual business model to see if its growth potential is still intact.
Jumia Has Diversified its Market Offering
Let’s dive deeper into the company’s earnings. In the second quarter, Jumia’s gross merchandise value (GMV) decreased by 14% after adjusting for the effects of a weaker dollar. No doubt this is a direct result of the economic slowdown caused by the Covid-19 pandemic. Africa has been hit hard with the pandemic yet its vaccination rates are among the lowest in the world. The continent has seen only 9.9 doses administered per 100 people.
The prolonged pandemic should be a negative blow to the African economy. This can be seen in the results of Jumia. Discretionary items such as phones and electronics accounted for 37% of GMV compared to 37% in the second quarter of 2020. Jumia smartly shifted its portfolio mix to emphasize everyday product categories. These products are consumer goods, grocery, fashion, beauty, food and grocery delivery.
Food delivery in particular was the fastest-growing category on the platform. It’s an interesting strategy for Jumia to target this vertical. However, it makes sense in the context of JumiaPay which is the PayPal (NASDAQ:PYPL) of Africa. Overall, I had been impressed with management’s ability to quickly diversify and thus minimize the blow from the pandemic. The investments in these new verticals will pay dividends in terms of growth once the pandemic is over.
Investor Takeaway
JMIA stock is currently trading valuations that can’t be considered cheap. The stock has a price-sales ratio of 11.4. This is despite the massive sell-off early this year. However, it might not take long for the company’s growth to resume. According to forecasts by the African Development Bank, GDP in Africa is expected to increase by 3.4%. This is a decent growth rate considering the continent suffered a less severe recession than expected in 2020.
Jumia’s fate is tied with the economic outlook for Africa. I believe long-term the African growth story remains intact despite short-term difficulties due to the coronavirus pandemic. Jumia’s scale and involvement in multiple businesses essentially make it the Alibaba (NYSE:BABA) of Africa.
Remember, Jumia is not just an online e-commerce platform but a payment processor and logistics company as well. Alibaba has a market cap of $398 billion much larger than Jumia’s $1.86 billion market cap. If the company can achieve even a portion of its growth plans, JMIA stockholders would be very well off.
On the date of publication, Joseph Nograles held a long position in BABA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
