Jumia Technologies (NYSE:JMIA) is an e-commerce and payment services company catering to the massive African market. The continent remains largely untapped in these niches and the company plans to establish a leadership position.
However, management’s penny-pinching strategy is puzzling and is seriously holding back top-line growth. Fundamentals hardly justify JMIA stock’s lofty price, with the shares now overvalued across all price metrics.
It trades at roughly 14 times forward sales despite posting negative 13% year-over-year revenue growth. For comparison, the Latin American e-commerce giant MercadoLibre (NASDAQ:MELI) trades at 12x forward sales.
And while JMIA stock has lost more than 36% of its value in the past three months, Jumia needs a much stronger outlook and fundamentals to justify its price even at these levels. It’s got a long way to go in its aspiration to be Africa’s Amazon (NASDAQ:AMZN).
Focusing On Profitability
In the past couple of years, the company has experienced fluctuations in its top-line growth. Africa is a tough market, and laying the foundation for e-commerce and digital services is challenging. However, the company’s management focus on profitability is more than surprising and is a recipe for disaster.
To their credit, EBITDA losses have started to improve significantly after the managements belt-tightening measures. The company’s sales and marketing expenses were $64 million in January last year and have fallen by almost 50%. Profitability is an admirable goal for any company, but focusing on it from the get-go is bewildering.
It needs to build its presence in new markets early on, which requires substantial investments. Its Q1 order count grew by just 3% on a YoY basis. If it continues on this path, growth is likely to stall despite the mammoth opportunity in Africa.
Jumia’s first-quarter results were a massive disappointment to investors. It posted revenues of 27.4 million EUR ($32.3 million), which represented a 6.4% drop from the prior-year period. Gross merchandise volume nosedived 165 million EUR, dropping 13% on a year-over-year basis.
On a more positive note, gross profit rose by 11% on a year-over-year basis. Moreover, its adjusted EBITDA loss dropped by 24% from the prior-year period, indicating that the cost-efficiency measures have started to pay dividends.
Furthermore, JumiaPay continues to grow rapidly, with total payment volume growth at 21% to €42.9 million. Additionally, on-platform penetration rose to 26% of the GMV compared to 18.7% in the prior-year period.
The management has not given concrete guidance on what to expect in the upcoming quarters. However, they did say that “we intend to gradually increase Sales & Advertising as well as Technology investments to support the long-term growth of the business while remaining committed to reducing Adjusted EBITDA loss in absolute terms in 2021 compared to 2020.”
Based on that statement, we can gather that the management is aware of the importance of sales and advertising to drive its revenues higher. However, the statement appears to be half-hearted as it mentions its adjusted EBITDA loss. Hence, the management needs to be clear in pushing for higher sales numbers through greater spending.
Bottom Line On JMIA Stock
Jumia has the potential to become a significant e-commerce player tapping into the growing African market. However, the lack of clarity in its strategic direction costs the JMIA stock price and its top line.
It needs to focus on growing its revenues and investing in its business rather than cutting costs and streamlining its operation. Until then, it’s tough to get excited about investing in overvalued JMIA stock.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.
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