Company / Analytics

Analytics, 25 November 2020

Jumia's stock doubles this week. Find out why?

Shares of the pan-African e-commerce giant Jumia Technologies rose 22% on Monday and has more than doubled in the past week, rising more than 68% to close at a 52-week high. The stock is up over 350% year to date but has been very unpredictable with many short-sellers. Does the recent rise signify a return to growth or another short squeeze?

Is Jumia a short-sellers favorite?

Stocks are sensitive to news. When Short Hills Capital Partners Chief Investment Officer Steve Weiss appeared on CNBC’s Fast Money: Halftime Report on Monday and talked about his bullish outlook for Jumia, the stock rose more than 22%.

However, that was not an isolated event as the stock has risen in the past each time an analyst has painted a rosy picture. When Citron Research called the stock a “generational buy,” the stock soared; Citron said the stock was heading for $100 per share.

According to analysts, Jumia stock appears to be polarizing among investors right now. In contrast to analysts promising multi-bagger returns, the stock is heavily shorted – about 19% of shares are sold short right now, according to Yahoo! Finance. With the stock rising so much so fast, some people who have a negative outlook on Jumia could be getting squeezed out.

But are these new highs the beginning for the stock?

In its recent earnings reports, Jumia posted a drop in gross merchandise volume, where losses narrowed considerably. Gross profit rose 22%, operating losses fell 49%, and total payment volume was up 50%. Its adjusted EBITDA of $22.7 million was an improvement from the $54.6 million loss last year. The company cut expenses, especially in sales and advertising, share-based compensation, and general and administrative expenses.

In terms of market share, Jumia has established itself as the leading pan-African e-commerce platform. It’s next priority as a listed company is to operate at break-even. In a recent joint statement, Co-CEOs Jeremy Hodara and Sacha Poignonnec noted that “the significant progress achieved was mostly attributable to the thorough work we have done on the fundamentals of our business, with limited support from external factors such as COVID-19.,” They added that “the business mix re-balancing initiated late last year has increased our exposure to everyday product categories and, combined with enhanced promotional discipline, supported unit economics.

The pan-African e-commerce’s financial strategy rests on four things: growing profitably, finding cost efficiencies, developing JumiaPay, and diversifying its business. Unit economics are improving. Gross profit per order rose by 29% to EUR 3.5. Now that orders are more profitable, the established user base and higher ordering volume will start paying off. It established itself as the destination of choice for brands in Africa. For example, Jumia on-boarded over 60 brands. When it hosted the Jumia Brand Festival in September, lots of big companies participated. So, the more customers that join and the more companies that participate, the bigger its platform gets.

JumiaPay is a potential growth driver for the company in the coming quarters. Investor appetite for e-payment services continues to grow. Transactions on JumiaPay accounted for 34% of total orders, of which 90% of the transactions were over €10. Furthermore, total payment volume rose by 50%, while the on-platform penetration topped 26%.

Reaching profitability will not take much for the company. As the adoption of e-commerce in Africa increases, it will not even need to rely on monetizing JumiaPay. However, the competition for e-payment services in Africa is quite strong, and Jumia is not making any money yet on payment service provider activities but is working on increasing revenues even with its current business size.

Outlook: What analysts are saying?

Whether Jumia Technologies will generate returns over the long haul remains to be seen. The company does have some good opportunities in e-commerce, payment processing, and gaming in underserved regions in Africa. But Jumia has had a hard time scaling its business in the past, which should keep investors somewhat cautious for now.

However, Jumia has cut costs by cutting its spending on big-ticket ads it used to do for phone brands and is now making more revenue from the third parties that sell on the platform. By focusing on becoming a platform for third parties, Jumia collects commission and becomes more efficient. In the end, it looks altogether possible for Jumia to become profitable soon.

Momentum investors should continue holding Jumia after its stock surge but sell it if profit-takers pressure the share price. Those who missed the rally will want to wait for a better entry price. The company needs to grow and post profits. When it does, then the stock will continue climbing to new highs. For now, today’s winners are those who bought Jumia stock when it was trading at $3.98. How’s that for a big return?

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