How has Jumia performed in the African market?

I joined the Stears Newsroom on 11th April 2022, and one of my highlights has been the daily briefing session every morning where we have spirited debates. We recently discussed Jumia, and I took a bullish stance on Jumia because of its investments to reap the long-term potential of e-commerce in Africa. I tried to convince my fellow analysts to buy and hold the stock, but only three out of ten budged. 

I concluded that most of my peers had no plans of buying mansions on Banana Island, at least not from the proceeds of Jumia stock in the long term. 

Today's article will focus on Africa's first unicorn and the only Africa-focused startup listed on the New York Stock Exchange (NYSE). At the end of the article, you should be able to decide if you want to be bullish or bearish on Jumia. (Disclaimer: this article is not financial advice). But before we begin that discussion, what does it mean to be bullish or bearish on a company. 

First, some important definitions. If you are bullish on a company, then you are a bull. A bull is an investor who buys a stock believing that it will rise. A bull assumes they will be able to sell the same stock at a higher price in the future. When a stock rises or falls, a bull can decide to sell or hold. 

Being bearish on a company is the exact opposite of bullish. If you are bearish on a company, then you are a bear. A bear believes that the stock price will decline in the future. Being bullish or bearish does not apply to company stocks alone but to other investment opportunities like real estate and commodities. 

Equipped with this knowledge, let us learn about the company at the centre of our discussion today.

Jumia, dubbed the Amazon of Africa, was founded in 2012 by two ex-McKinsey consultants, Jérémy Hodara and Sacha Poignonnec, alongside Tunde Kehinde and Kofi Afaedor. Launched in Nigeria, it quickly expanded to Egypt, Kenya, Morocco, Ivory Coast and South Africa. By 2018, it was present in 14 African countries. 

Jumia raised a $45m Series A investment from Blakeney Management, Millicom Systems and Berlin-based Rocket Internet in January 2012. The startup raised $885m over the next seven years, including a $400m Series C in March 2016, a funding round that made it Africa's first unicorn (a private startup valued at over $1bn). 

In April 2019, Jumia went public on the New York Stock Exchange, becoming the first Africa-focused company to achieve this feat. It went public at $14.50 a share and raised $196m in net proceeds at a $1.2bn valuation. Just four days later, the stock price rose to $49.77, valuing the startup at $3.8bn, a record for an African startup. 

But this did not last. 

The stock fell spectacularly over the following weeks falling to an all-time low of $2.15 in August 2019 as it battled allegations of fraud and concealed losses. It also had a public relations disaster as users in Africa debated its "African-ness" because its headquarters are in Berlin, Germany, and most of its top company executives are white. 

At the time of writing, Jumia is currently trading at $7.68 with a market cap of $745.08m, almost half its IPO value. It is clear that when Jumia went public, investors were optimistic about the company's prospects. But this optimism has waned, and Jumia's stock price has taken a beating. 

Why is Jumia stock tanking, and what should you do? Over the following paragraphs, we will explore this. We will begin with reasons why you should be bearish on Jumia.

Do you want to own stock of a loss-making machine?

Jumia went public in 2019 and has never had a profitable quarter. Making profits is the cardinal rule of any business. When you invest money in any business, you expect to make that money back with a profit. This is the only way a business can be sustainable.

A profitable business rewards its investors, can hire quality talent or use the profits to expand to new markets/services and increase revenue. This can not be said about Jumia. To understand why Jumia makes losses, we need to know how it makes money. Jumia has multiple revenue streams, so let us break them down. 

As of Q1 2022, Jumia makes money from retail. These are goods that Jumia purchases from suppliers/manufacturers at wholesale prices and resells directly to consumers for a profit. It also makes money from advertising and marketing. Millions of people visit the Jumia app and website, so it sells advertising space to manufacturers like Xiaomi, L'Oreal and many others. 

Jumia also operates its payment platform, Jumia Pay, from which it takes a commission off each transaction. Logistics-as-a-service is another revenue stream for Jumia. Finally, we have commissions from restaurants that use the Jumia Food platform and third-party sellers on the e-commerce platform. 

Multiple income streams is a smart business strategy because it is not enough to survive on just one. A startup with a solitary revenue stream risks having the majority of its revenue wiped away instantly. For example, movements were restricted at the height of the COVID-19 pandemic and the ensuing lockdowns. Uber relied on other revenue streams like deliveries (food, groceries and pharmaceuticals) to wither the pandemic. 

Conversely, companies like Airbnb that rely almost entirely on one revenue stream were severely hit. In Q2 2020, revenue declined by 72% year-over-year, and it had lost more money within the first nine months of 2020 ($696.9m) than it had in 2019 ($674.33m). This gives you a picture of how dangerous it is to rely on one income stream. 

Looking at Jumia's financials for Q1 2022, it made $47.6m(44% growth Y-O-Y) but spent $133.2m in expenses, including $18.8m (93.8% Y-O-Y) on sales and advertisement and $38.6m (27.7% Y-O-Y) in general and administrative costs and made a loss of $66.4m, a 63.5% growth Y-O-Y. 

Revenue and profits are two of the most critical metrics for any business. Revenue shows us how much a company is spending to make a certain amount of money (profits). Profitable companies spend less than they make. Per Jumia's Q1 2022 financials, it spends almost 3x what it makes. This is borderline unsustainable. And Q1 2022 was not an outlier but the norm for Jumia. 

The losses are mounting for the company. In the last four quarters, the e-commerce giant has made net losses of about $68m on average compared to $49m in the ten quarters before that. Essentially, Jumia has not shown any ability to make profits. In comparison, its South American equivalent, Mecardo Libre, was profitable from the time of its IPO in August 2007, while Amazon became profitable in 2003, six years after its IPO and eight after it was founded. Jumia has been operating for a decade now and has been a public company for six years now. 

Too old to be experimenting

Another point investors bearish on Jumia bring up is that the company appears to be stuck in an experimentation phase. When a company goes public, it is expected to be a mature firm, and such companies are characterised by having a well-known product and a loyal customer following. However, Jumia still operates like a startup in the product development and market introduction phases.  

The primary characteristic of startups in such phases include pivoting as it searches for a product-market fit. A product-market fit was defined by Marc Andreessen, General Partner of Andreessen Horowitz, as being in a good market with a product that can satisfy that market. Jumia has struggled to find one, which has led to constant pivots. 

When Jumia first started operations in 2012, it was an online retailer. But in 2020, it started shifting to a marketplace by allowing third-party sellers on its platform. It has also shifted from focusing on big-ticket items like phones and electronics to Fast Consumer Moving Goods (FCMGs) after probably realising that its target market did not have enough disposable income to purchase the latter regularly.  

Jumia's sales of FCMGs grew 180% Y-O-Y in Q1 2022, becoming the second-largest category in terms of items sold, only behind fashion. They accounted for 15% of all items sold that quarter.

Jumia has also scaled back on some of its geographical operations, exiting Gabon, Tanzania, and Cameroon quickly. They have also stopped operations of services like Jumia Travel (a hotel booking service), Jumia House (an online real estate marketplace) and Jumia Deals( an online classifieds platform). This can signal that Jumia has learnt from its earlier mistakes and cut its losses, but some investors could interpret it as the e-commerce giant is far from finding a market fit product. For a public company, this is unacceptable.  

Jumia has operations in 11 African countries, which account for 600m people, 70% of Africa's GDP and 70% of Africa's internet users. But there is growing concern that the e-commerce potential of the continent might have been oversold, with 490 million people in Africa living under the poverty line of $1.90 PPP/day. 

At this point, you must be wondering why I would be bullish on Jumia. All I have pointed out so far shows how poorly Jumia is performing, and it is fair for one to justify my teammates' decision to be bearish. But let me explain why you should still be bullish, even with the reasons above.  

The criticism against Jumia has been a little bit harsh

Jumia has been harshly criticised especially for its loss-making growth first strategy. One key feature of building out of the African ecosystem is the "bring your infrastructure" requirement. This means African startups don't have the luxury of their US and European counterparts of leveraging existing infrastructure at the genesis of their operations. 

Jumia has had to build all the infrastructure required for its operations. This has meant investing in developing the logistics framework it would use to get goods to customers and the online payments service (JumiaPay) that customers can use to pay. Of course, we have seen Amazon go on to create its own logistics service; but its case was borne out of evolution rather than necessity. In 2018, Jeff Bezos and his team understood that the US postal system had become inadequate for fulfilling Amazon's customers' demands. As a result, the company assumed full responsibility for its logistical operations. 

I am bringing out here that Jumia has not had this luxury. It's no wonder that analysts have claimed that the US Postal System largely subsidised Amazon's operations at different points. 

Jumia has to forego profitability today to focus on building infrastructure to grow its e-commerce market for the foreseeable future. With the already existing infrastructure, it took Amazon 9 years to become profitable, and it is safe to assume that Jumia (without such infrastructure) will (without this infrastructure) take much longer.

But apart from this, what excites me the most about Jumia's future is its monetisation efforts. Relying on the marketplace and retail sales may not be enough for Jumia to become a profitable company, but its other revenue streams could be the answer. 

When a company is incorporating other revenue streams, it could indicate that it is struggling to find a market fit product as we noted earlier. But this can signal that the company has paid its dues in the market and understands it better than when it started. 

Struggling to find a market fit product is typical for startups. Airbnb launched about three times; the original business model of Uber was to buy high-end Mercedes cars to offer a taxi service, while PayPal was supposed to be a digital bank, not a payments facilitator. 

Jumia's experimentation is not a unique problem to the company alone but common in startups. If the other companies finally figured it out, then it is fair to give Jumia a chance. 

Let us see how the experimentation and multiple revenue streams can help Jumia in the long term. 

Experimentation and multiple revenue streams could be the key

Jumia's shift from a retailer to an online marketplace could be the path to profitability that it needs. As a retailer, Jumia has to purchase products from suppliers/manufacturers at wholesale prices and then resell them at a profit. There are many disadvantages to such a business model. The number of products available for consumers can be limited because it is almost impossible to stock everything. The profit margins might be low, and the retailer carries many risks.  

But the marketplace model enables Jumia to focus on building a platform that third-party sellers can use. This instantly means an almost unlimited line of products for the consumer. And Jumia can make higher margins through sales commissions and delivery fees without carrying significant risks. If no one buys a particular product, Jumia does not lose any investment, and this loss is on the third party seller. This marketplace model has made Chinese e-commerce giant Alibaba one of the world's most valuable companies.  

Alibaba has multiple marketplace offerings for different users. Its flagship service, Alibaba, is a marketplace for Chinese manufacturers to sell to global consumers. AliExpress is a marketplace for thousands of Chinese small retail businesses to sell to a global audience. Then there is Taobao, a customer to customer (C2C) marketplace and Taobao Mall (TMall), a marketplace for global brands to sell to Chinese consumers. 

Per Alibaba's 2021 Financials, it had revenues of $134.56bn and a net income of $9.774bn. It had 1.28bn active users in China and all over the world. Alibaba has a market cap of $254.68bn, making it the world's 33rd most valuable company. This is a fall from its peak of $837.84bn on 22nd October 2020. Jumia probably recognized that the online retail model championed by Amazon is not suitable for the African market, and the Alibaba marketplace model might be. The early China e-commerce market was similar to the current e-commerce market in Africa. (Low internet penetration, lack of online payments and logistics problems).

Jumia has also diversified its revenue, which is essential for e-commerce startups. We have already covered the importance of a company diversifying its revenue streams. 

Amazon, the world's largest e-commerce company by revenue and market cap, is a successful example of revenue diversification away from retail sales.

 In 2021, it made $469.8billion in revenue. Of this, only 47.3% came from its online stores. 

Jumia has followed this path. In its latest Q1 2022 Financials, Jumia showed how its other services are now coming of age. It has 600 Logistics partners in 11 countries and 3,000 pick up points. In the last quarter, it delivered 3.5m packages for 1,250 clients, making $1.2m. In April 2022, Jumia announced a partnership with American logistics giant UPS. Such a partnership signals Jumia's emergence as the pre-eminent logistics provider on the African continent. 

Another revenue stream is advertisements. Leveraging its over 2m monthly visitors, Jumia has built an advertisement business that could contribute heavily to revenue in the future. Its clients include Unilever, Xiaomi, Coca Cola, Krispy Kreme, and Adidas. Advertisements made $2.7m in Q1, growing 40% Y-O-Y. 

Then there is JumiaPay. In Q1 2022, JumiaPay accounted for 36.7% of all transactions made on the platform, and it processed $70.7m across 3.2m transactions. Jumia acquired a payments license in two of its biggest markets, Egypt and Nigeria. It wants to take JumiaPay off-platform so that other vendors can use it. 

If Jumia can grow all these other services to contribute at least 50% of its revenue, it might become profitable. 

Jumia's glaring losses overshadow other metrics like revenue and the number of users, which are growing almost every quarter. From Q1 to Q3 every year, revenue has increased quarter-over-quarter except for Q4s vs Q1s. This is understandable. Q4 includes the festive period and Black Friday, when consumers' purchasing power is usually high. 

Jumia had 2.7m users in Q4 2017. A year later, it had 4m users and 6.1m in Q4 2019. By Q4 2020, Jumia counted 6.8m, active users, and this figure has been growing every quarter since Q4-2017. 

These metrics show that despite the losses Jumia is making, the appetite for e-commerce is growing, and its strategy of focusing on growth and acquiring new first time customers is justified. Ultimately, Jumia's biggest crime must have been going public where it is expected to show profitability or a clear path to one, other than focusing on growth. 

The verdict

Being bullish or bearish on a stock always depends on the investment philosophy of an investor. For some investors, net income is the most critical metric. This is important for investors that consider the company's performance now, rather than its performance tomorrow or in a decade. If this is your philosophy, you should be bearish on Jumia. 

Some investors prefer metrics like revenue and user growth, and this is looking at how a company will make money in the future. These are high-risk bets that might not turn out. If you have such a risk appetite and are willing to bet for the long term, you should be bullish on Jumia. 

In 2021, Africa's entire e-commerce revenue was valued at $27.97bn. Jumia made revenues of $180m that year, which amounts to 0.6% of all African e-commerce revenue. In 2025, Africa's e-commerce market revenue is estimated to be $46.1bn. Going by current market share, Jumia will make revenues of $277m (all other factors remaining constant). If it can expand its market share to 1%, it will make about $460m. 

It remains to be seen how Jumia's expenses will grow over time, especially marketing and sales. But at the end of the day, there will be winners in the African e-commerce boom, and Jumia is in an excellent position to be one of them (if not the most dominant) in the long term.