Ahead of the first trading day of this year, I warned investors away from Jumia Technologies AG (NYSE:JMIA) stock.

For a moment, the call looked solid, as shares dipped. But a rally that had begun in November accelerated. By mid-February, shares of the African e-commerce retailer had moved from $40 at year-end to $65.

Around the same time, an epic rally in small-cap stocks — and particularly small-cap growth stocks — started to peter out. JMIA stock was not immune. Shares now have been halved from the highs, and are down 27% year-to-date.

I don’t bring up that trading to highlight my earlier call. Rather, I’m trying to make an important point: Investors can’t see Jumia stock as “cheap” simply because it has been halved.

In fact, it seems far more likely that the stock has been halved because it benefited from a broader rally that simply went too far. In a more normal market, investors have been selling, and there are reasons to believe they will continue to do so.

Growth or Profits

Generally speaking, companies need to offer either growth or profitability.

An unprofitable company can be valuable if it’s growing quickly and shows a path to big profits in the future. Indeed, lately we’ve seen valuations of tens of billions of dollars applied to companies that aren’t expected to be profitable until 2022 or even 2023.

And, of course, a profitable company can be valuable even if it’s not growing that quickly at all. Some of the most widely owned large-cap stocks, for instance, see their earnings rise less than 10% a year. But consistent growth, even if it’s modest growth, can create real returns for long-term shareholders.

Here’s the problem with JMIA stock: It’s not doing either.

In 2020, revenue dropped 13% year-over-year. There are some one-time factors that we’ll get to, but the novel coronavirus pandemic was a boon to e-commerce companies worldwide. Nearly all of those operators saw their growth rates increase last year as brick-and-mortar stores shut down. Jumia reverted from growth to decline.

Meanwhile, Jumia’s losses are almost staggering. Its operating loss in 2020 was 107% of revenue. Looking at Adjusted EBITDA, the most favorable possible metric, the company still lost 0.85 EUR for every 1 EUR in revenue.

In fact, for the year, on the average order Jumia lost 4.28 EUR, or more than $5.

A Closer Look at JMIA Stock

Simply to look at the numbers, this seems like a company on a straight path to bankruptcy. The combination of massive losses and declining revenue looks like a recipe for disaster.

But, again, there were some one-time factors that management would cite to explain last year’s performance. The problem is that those factors don’t explain all of the weakness in Jumia’s fundamentals.

For instance, Jumia pulled back sharply last year on the sale of airtime for prepaid wireless phones. That business simply wasn’t profitable.

But as Jumia itself noted in its fourth quarter press release, orders outside of that category were stable last year. For an e-commerce company that should be benefiting from external events, stable isn’t good enough. It’s not close to good enough.

Jumia also cut back on its spending in a bid to stem some of its losses. Sales and advertising expense declined 42%, and general and administrative expense 12% (ignoring non-cash share-based compensation).

This isn’t a good thing, however. If we’re going to pay up for an unprofitable company, it should have growth opportunities that it’s investing into. If it doesn’t, what are we here for?

A Vicious Cycle

And so we get to the problem with JMIA stock. At some point, something needs to change. Either Jumia needs to start growing, or it needs to start turning a profit.

But it can’t turn a profit without growing. And it can’t grow without spending; no early-stage business can.

Now, you can take the super-long view of Jumia as a company that will succeed eventually. The infrastructure in Africa isn’t quite ready for an e-commerce leader: a full 16% of Jumia’s orders were cancelled, returned or failed to deliver last year. That figure did drop year over year, and it will continue to do so. As it does, Jumia may be positioned to be the leader on the continent.

The problem with that super-long view is that we’re talking about owning the stock today. And while I’m fully in favor of patience with growth stocks, there is a limit.

Jumia is past that limit. The company is a long way from success, with stagnant revenue and significant cash burn.

And because of the big losses, it has to keep selling stock. A 203 million EUR offering hit in December. The company sold another $349 million in American Depositary Shares (which is what JMIA shareholders actually own) “at the market” in the last two weeks of March.

So even an investor who believes in Jumia long-term is facing, in the near-term, dilution and selling pressure. Between that and the disappointing results, even in the best-case scenario, there’s no need to rush.

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 the article.

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