Wednesday, October 5 2022

Emerge market shares like MercadoLibre and coupang tend to get a lot of love from investors. That said, it seems that one region – a large region, that is – of the world is generally left out of most conversations: Africa. I don’t know why this is the case. After all, Africa is home to 54 countries and 1.4 billion people, providing businesses with unlimited opportunities for innovation and growth.

Jumia Technologies (NYSE: JMIA) is an Africa-focused e-commerce company that also operates in financial technology (fintech) and logistics. Africa is expected to eclipse half a billion e-commerce users by 2025, which equates to a compound annual growth rate (CAGR) of 17%, but what is staggering is that such a projection represents only a 40% penetration rate on the continent. Thus, there is no doubt that the long-term potential of Jumia’s business is at its peak.

The company released its second-quarter earnings report on August 10, sending its stock price up nearly 20%. Even so, the African e-commerce stock is still down 68% since its IPO in 2019, so it’s not too late for investors to join us. On that note, let’s take a look at Jumia’s current situation to help determine if it’s a worthy investment right now.

Image source: Getty Images.

Jumia’s business gains momentum

Upon exiting in the second quarter, the e-commerce business increased total sales 42.5% year-over-year to $57.3 million. Other key operational metrics also improved: active customers increased 25.9% to 3.4 million, and total orders increased 35.5% to 10.3 million. Gross Merchandise Volume (GMV), which indicates the total value of all goods sold on the platform, also climbed 21.3% to $271.1 million.

There is a caveat to be aware of, however: the company suffered an adjusted earnings before interest, tax, depreciation and amortization (EBITDA) loss of $57.2 million in the quarter. Operating losses are nothing new for Jumia, but management seems optimistic about the company’s future.

Although it reiterated its expectation of an adjusted EBITDA loss of between $200 million and $220 million for the full year, executives said its largest quarterly losses were a thing of the past and 2023 should be a significantly better year in terms of profitability.

Meanwhile, the total payment volume (TPV) of its JumiaPay business jumped 31.1% year-on-year to $74.2 million, and the number of transactions increased by 25, 9% to reach 3.4 million.

Starting in FY2023, JumiaPay will generate off-platform payment processing revenue through third-party merchants. In my view, this is a major catalyst to watch and certainly a huge opportunity for Jumia’s overall business given the large addressable market for the mobile payment industry in Africa.

Should investors pull the trigger on Jumia?

Rightly, investors’ primary concern about Jumia is its ability to become a profitable long-term company. So far, management has increased spending in order to grow the business, but it seems the company’s biggest quarterly losses are a thing of the past. Progress is being made, and while it may take some time, investors buying at current levels could enjoy massive gains in the future.

This, however, does not involve little risk. The e-commerce company currently has $350.8 million in cash, cash equivalents and investments, so it has secured enough time before needing additional funding. That said, it is crucial that Jumia continues to grow its business while reducing costs over the coming quarters.

But given its recent upturns, huge market potential, and falling share price, I think Jumia has a favorable risk-reward profile today.

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Luke Meindl holds positions at Jumia Technologies AG-ADR. The Motley Fool fills positions and recommends Coupang, Inc. and MercadoLibre. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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