JMIA Stock Is Flying High But What Is This e-Commerce Really Worth?

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When Jumia Technologies (NASDAQ:JMIA) sold shares late last year, the selling pressure did not last long. JMIA stock dipped from around $37 to $28, only to continue its uptrend. Even though the internet retailer of Africa posted a pair of weak data points, investors are adding to the position.

After posting a weak third-quarter report, why might markets bullish on Jumia Technologies?

JMIA Stock A 2020 Winner

Jumia rose nearly 18-fold from its 52-week low in 2020. Investors are up by five times on their investment for the year. To capitalize on the stock’s meteoric rise, the pan-African e-commerce platform leader filed a stock sale. The 7,969,984 shares at $36.89 will add around $294 million in cash.

The stock sale is approximately 10% dilution. Still, Citigroup (NYSE:C) is willing to invest in Jumia, a positive sign. In return, the company has more cash on hand to invest in the business and its operations. After the stock continued the rally, markets signaled their confidence in management. The dilution is a short-term blip that will pay off, provided that management reverses the quarterly revenue weakness in its platform.

In the third quarter, Jumia posted a gross profit margin increasing just 514 basis points. Yet it reported that phones and electronics accounted for 56% of GMV last year and 43% this year. Management viewed the drop as evidence of driving higher customer lifetime value. It also foresaw long-term margins increasing.

Improved Product Mix

Relying less on phones and electronics will increase Jumia’s product mix diversification. Still, phones and electronics are the hottest growing segment. The company cannot afford to report unit sales declining in this sector. Plus, increasing the product mix may not necessarily lift profit margins.

Jumia will need to increase marketing spend and support higher operating costs as the product variety increases. Investors should note that it touted a 20% drop in fulfillment expense year-over-year in Q3. The 55% drop in advertising expense.

In the last quarter, revenue fell by 17.7%. GMV fell by 28% Y/Y, due to the business mix rebalancing. Investors should express doubt on Jumia’s chances of reversing the GMV decline. The cash raised will give it the resources needed for increasing marketing spending. In doing so, it will burn its cash on hand and will need to sell shares again in the future.

Fair Value

Only three analysts offer a price target on Jumia. The average 12-month price target is only $13.00 (according to Tipranks). To justify a fair value in the $40.00 or higher range, Jumia must post revenue growing by at least 35% this year. This is followed by the assumption that investments in the business will boost revenue growth.

Review the five-year discounted cash flow model (revenue exit) below:

Metrics Range Conclusion Discount Rate 10.5% – 9.5% 10.00% Terminal Revenue Multiple 6.6x – 7.6x 7.1x Fair Value $38.27 – $45.31 $41.73

Model courtesy of finbox (CLICK on the link to change input)

Assume yearly revenue changes as high as 45%, peaking in the fiscal year 2022:

(EUR in millions) Input Projections Fiscal Years Ending 19-Dec 20-Dec 21-Dec 22-Dec 23-Dec 24-Dec Revenue 160 140 189 274 384 537 % Growth 24.30% -12.70% 35.00% 45.00% 40.00% 40.00% EBITDA -222 -119 -103 0 38 67 % of Revenue -138.60% -85.00% -54.40% 0.00% 10.00% 12.50%

Model courtesy of finbox

The peak annual revenue growth will factor in the risks of competition, weakening consumer demand, and product sales saturation. If those assumptions do not occur, readers may raise revenue growth in FY 2023-2024. The stock’s fair value will increase with the new input projections.

Your Takeaway

Investors are speculating that Jumia will become the Amazon (NASDAQ:AMZN) of Africa. With a population of 1.3 billion people (per slide 4) and 523 million internet users, Jumia will potentially dominate the market.

Cautious investors may afford to wait for the company to prove itself. The stock already more than prices in the most optimistic scenario. Besides, Jumia has an overall score of 14/100 on Stock Rover.

Look out for unfavorable seasonal weakness ahead.

Chart courtesy of Stock Rover

The unfavorable valuations, combined with a seasonal weakness ahead, are two reasons to be careful with this stock.

Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

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