At first glance, the bullish narrative for Jumia Technologies (NYSE:JMIA) appears powerfully compelling. Primarily, the biggest investment gains are not made by piling into opportunities that everybody recognizes. Instead, you invest in what will be. Arguably, there’s no greater case for wholesale upside than the broader African market, which invariably has boosted JMIA stock.
Let’s just start with the basics. The African continent boasts a population of over 1.36 billion people, which is equivalent to nearly 17% of the global population. Significantly, the median age in this vast region is just under 20 years. While other major powers feature an aging or declining demographic, Africa is young and vibrant.
Secondly, with such strong numbers, this represents ample opportunities for e-commerce services. I’ve been fortunate enough to travel around the world, and the one thing I’m reminded of is that we’re not all that different. If we can get what we want conveniently and at a reasonable price, we’ll take it. This path-of-least-resistance argument is central to JMIA stock.
Further, we’ve seen just how much e-commerce has blown up in our own country because of the pandemic. During the second quarter of 2020, e-commerce represented over 16% of total retail sales in the U.S. In the year-ago quarter, this metric was just under 11%.
Moving forward, I anticipate strong upkeep with online retail sales. Once people get a taste of the paradigm shift of technology, it’s hard to give up. On paper, the same argument applies to the African e-commerce rollout, which benefits JMIA stock.
Finally, we’ve seen firsthand how life-changing investments in China have been for forward-thinking investors. According to economist and Assistant Vice President at the Federal Reserve Bank of St. Louis Yi Wen, in the early 1980s, “China’s per capita income was only one-third of that of sub-Sahara Africa.”
If you’ve been to China in the last few years, you know that’s absolutely not the case today. So, why am I not getting the warm and fuzzies over Jumia Technologies? Here are three headwinds to ponder.
1) JMIA Stock Is Simply Overvalued
Although the broader narrative for JMIA stock is appealing, investors must set that aside and consider the strengths of the target company. Here, Jumia has some attributes that inspire a modicum of confidence. For instance, it has a robust cash-to-debt ratio. As well, its Altman Z-Score is at 12 points, denoting a safe and stable organization.
But strength in the balance sheet doesn’t automatically translate to shareholder profitability. That’s what we’re here for, isn’t it? Thus, the problems with valuation for JMIA stock are difficult to ignore. For example, shares are priced at nearly 55 times book value, just staggering compared to the retail industry. Also, JMIA is priced at almost 30 times sales, which again is off the charts for retailers.
Yet the masses continue to pile in. You look at the numbers, and it’s tough to even think about justifying the rally.
2) Chronic Challenges in African Connectivity Endeavors
Here’s a statement from the World Bank that caught my eye:
“Across Africa, where less than a third of the population has access to broadband connectivity, achieving universal, affordable, and good quality internet access by 2030 will require an investment of US $100 billion. This is according to a report launched at the Annual Meetings of the World Bank Group, which calls for urgent action to close the internet access gap while providing a roadmap to reach this ambitious goal.”
In other words, the ambition to integrate connectivity technologies throughout the African continent is evident. But it will require massive investment dollars to get the ball rolling. Jumia alone isn’t going to transform this expansive market, which is something you need to consider before buying JMIA stock.
True, Jumia’s home market of Nigeria features comparatively strong internet penetration at just under 47% in 2020. Still, that may be a tough challenge for an e-commerce outfit. Additionally, it won’t be until 2025 that internet penetration is projected to hit 65.2%.
Still, projections aren’t facts. That Jumia hasn’t been profitable in its current state doesn’t really inspire much confidence.
3) The Market Has Gone Crazy
I’m not going to dive into the nitty gritty, but suffice it to say many stocks have decoupled from their underlying companies. Sure, it’s fun while you’re on the train. When it crashes — and these things eventually do come to an end — it’s not so fun anymore.
Well, we’re seeing a similar situation play out with JMIA stock. Admittedly, its narrative on paper is intriguing. And that’s what people in this emotionally heightened ecosystem like to see. Narratives are easy to follow and digest. Egged on by others, it’s easy to get swept up in the euphoria.
But at the same time, narratives can be misleading. Unfortunately, the hard numbers tell a tale of fiscal mediocrity — not bad, but not great. Therefore, I can’t justify paying a premium for an average, commonplace performance.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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