With “story stocks” selling off in a big way, what’s next for Jumia Technologies (NYSE:JMIA) stock? Starting late last year, investors dived into this African e-commerce play with great enthusiasm. And, why not? As a first mover in frontier markets, on the surface this looks like a great opportunity.
The problem? Investors have priced this stock as if the “payoff” has already happened. That is to say, as if it’s become an e-commerce powerhouse in Africa.
Some may compare Jumia to more established e-commerce names operating in large, developed economies like the U.S. and China. But it’s a long road ahead until it gets to that point. Granted, it’s built up a meaningful business. But, even after falling around 40% off its highs, today’s valuation more than factors in how much this company can grow in the coming years.
I’m not saying this company won’t eventually scale up into a profitable enterprise. What I’m saying is, as it deals with many hurdles, it will likely take many years for this company’s results to live up to expectations.
In the meantime, continue to avoid it, given the high chances of further price declines.
JMIA Stock and Its Recent Sell-Off
As you likely know, stocks that surged on growth narratives have sold off tremendously in recent weeks. With interest rates rising, Wall Street is reassessing some of the inflated valuations given to stocks based upon their projected growth numbers alone. And, as Wall Street drives “story stocks” lower, Main Street investors have followed suit. Those who got in early are taking profit. And those who got it near markets highs are cutting their losses.
Jumia stock hasn’t been spared from this correction. During the stock market “melt-up” we saw in recent months, shares saw an unsustainable upward surge. Trading for around $16 per share at the start of November, by early February the stock was nearing $70 per share.
Around the time this occurred, I gave three reasons for avoiding JMIA stock at those price levels. First, valuation was completely out of whack with fundamentals. Second, concerns about the current level of internet penetration in Africa. Third, concerns that the stock would face outsized declines in a downturn. In short, overpriced relative to its many weaknesses.
With its cratering in recent weeks (from nearly $70 per share, to around $42 per share today), this third concern is already playing out. But, the two other issues have yet to be fully factored into Jumia’s stock price. This points to further downside ahead. Even once the current sell-off in “story stocks” starts to end.
Even if Markets Stabilize, This ‘Story Stock’ Could Still Tumble
Putting it simply, buying JMIA stock now is like trying to catch a falling knife. After its rapid decline, some may see it ready to bounce back. But, even if the recent sell-off in growth stocks takes a breather, this particular name could continue to tumble.
Markets overall may be correcting. But, for many stocks now deemed “overvalued,” their strong growth prospects may minimize how far they fall from their all-time highs. Unfortunately, that doesn’t look to be the case here with Jumia. Why? Its fundamentals aren’t enough to support even its current valuation.
Why? Taking a look at the company’s recent financial results (released on Feb. 24), it’s clear why that’s the case. Yes, comparing 2020 revenue to 2019 isn’t apples-to-apples. Pivoting towards a third-party marketplace business model, the declines seen year-over-year (12.9%) were expected.
But, while its marketplace revenue grew at a decent clip (19.6% year-over-year), it’s far from enough to support valuing this company at current multiples. Even if it winds up meeting expectations in the coming year, by growing its overall sales by 22.1%, that’s hardly enough to support its rich forward price-to-sales multiple.
As investors digest these results, and reassess the true prospects of this company, expect further declines ahead.
Bottom Line: Still Overpriced, Continue to Stay Away
Taken by themselves, Jumia’s recent financial results aren’t the worst thing in the world. It’s still trying to find success in markets where a build-out of internet infrastructure remains a work in progress. Until this happens, it’s going to be tough for this company to start “crushing it.”
But, given shares remain priced as if it’s already “crushing it,” its performance is bad news for investors buying it today. Its “story” may have been enough for investors buying out of FOMO. Yet, as fundamentals again become the main way investors price stocks, this isn’t going to cut it anymore.
How much lower could shares fall? Likely far below where JMIA stock trades today. In short, more than enough reason to avoid buying it while it’s on its current trajectory.
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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