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Jumia Technologies (NYSE:JMIA) has historically been a divisive stock due to the “Amazon of Africa narrative” and the extremely poor fundamentals of the business. I long felt that the company had poor prospects due to its limited financial resources and pursuit of growth at all costs. After a change in management, the company is on its way to building a sustainable business, although it still needs to prove that it can generate profitable growth.
The last time I wrote about Jumia, I suggested that improvements in the fundamentals of the business were not being appreciated by the market. The stock is up over 50% since then, with Jumia’s first quarter results demonstrating further progress towards profitability and a return to growth.
Market Conditions
A number of Jumia’s core markets, particularly Egypt and Nigeria, are suffering from high inflation rates, currency depreciation and scarcity of supply. While this is negatively impacting Jumia’s business, the company is seeing order growth in countries like Nigeria and Ghana. This suggests that Jumia will do well once macro conditions stabilize. Jumia believes that recent policy changes are positive in this regard. For example, the Egyptian government recently floated the Egyptian pound and significantly increased interest rates. I would be cautious in regard to expectations for emerging markets while interest rates remain elevated in the US, though.
Jumia Business Updates
Jumia’s business has changed enormously in recent years, and with new management and a shift in strategy, the company now has a viable future. Most of this is based around pursuing activities with better economics while reducing costs, even if this comes at the expense of growth. The clearest example of the change in Jumia’s business is the 43% reduction in headcount since the end of 2022. Jumia also reduced marketing spend by 30% YoY in Q1, in part by making greater utilization of more efficient marketing channels, including CRM and SEO.
The pursuit of profitability has weighed on growth, though, with Jumia’s revenue fairly flat over the past 2 years. While Jumia still has work to do to achieve breakeven, a return to growth will be an increasingly important part of the company’s story going forward. Some of this will naturally come from a more stable macro environment, but Jumia must also start driving sustainable long-term growth (more users, greater product variety, advertising, etc.).
To help vendors reach more consumers, Jumia is trying to penetrate the population outside of major urban centers. Approximately 51% of Jumia’s orders currently come from outside capital cities, up 3% YoY. While this is important to the company’s future, it will be challenging to do profitability given logistical challenges.
In support of expansion outside urban centers, Jumia is developing its logistics capabilities, including an 18% YoY increase in pickup station deliveries. Jumia is also investing in proprietary systems to reduce costs and improve scalability. Fulfillment expenses as a percentage of GMV declined from 7% to 5% over the past year, with fulfillment expense per order down 20%. While this is a positive, it is difficult to know how much of this has come from larger average order sizes and a shift in mix towards higher value items versus warehouse and delivery improvements.
Jumia Technologies Financial Analysis
Jumia generated $48.9 million revenue in Q1, up 19% YoY, with GMV increasing 5% to $181.5 million. Marketplace revenue increased 11% YoY, while first party sales were up 29%. Within marketplace revenue, the mix continues to shift towards activities with better economics (commissions and marketing and advertising).
While this is all positive, the number of active consumers on the platform continues to decline. This isn’t necessarily a problem given Jumia’s shift away from low-value activities, like groceries, and the reduction in consumer incentives. At some stage in the near future, investors will expect a return to increase consumer numbers, particularly given Jumia’s small user base.
Figure 1: Jumia Revenue (source: Created by author using data from Jumia)
One disappointing aspect of Jumia’s first quarter earnings was the drop in marketing and advertising revenue. This should be a high margin source of revenue, and ideally, it will grow significantly over time.
Figure 2: Jumia Marketplace Revenue (source: Created by author using data from Jumia)
Jumia’s gross profit margins continue to improve on the back of improved marketplace margins, reduced customer incentives, revenue mix and reduced fulfillment costs. Fulfillment expenses declined 21% YoY to $9.4 million. While Jumia is expanding its logistics footprint, the company is improving efficiency and reducing packaging costs.
Figure 3: Jumia Gross Profit Margin (source: Created by author using data from Jumia)
Most of the recent improvement in fulfillment expenses likely comes from a shift in sales mix towards higher value items and increasing average order sizes.
Figure 4: Jumia Fulfillment Costs (source: Created by author using data from Jumia)
Figure 5: Jumia Physical Goods Mix (source: Jumia)
Sales and advertising expenses totaled $3.7 million in the first quarter, down 30% YoY, driven by more efficient marketing spend. Jumia has been focused on supporting demand by improving supply and has been shifting marketing spend to more efficient channels. Other overhead expenses have also been declining due to a mix of cost controls, reduced headcount and a shift in headcount to Africa.
As a result, Jumia’s profit margins and cash flows continue to rapidly improve. Jumia was hit by a largely non-cash finance cost in the first quarter, though, driven by significant foreign exchange impact. I have been skeptical about whether Jumia can reach breakeven just by cutting costs, but the company appears to be on track at this point, particularly if the macro environment becomes more supportive.
Figure 6: Jumia Operating Profit Margin (source: Created by author using data from Jumia)
Figure 7: Jumia Sales and Advertising Expenses and Consumer Incentives (million USD) (source: Jumia)
Conclusion
Jumia now appears to be building a sustainable business which can grow without burning enormous amounts of capital, and it needs to be valued as such. There is enormous growth potential, both in terms of user adoption and products and services. There is also significant risk, as demonstrated by recent currency fluctuations. Outside the geographic risk, Jumia’s competitive positioning is also questionable, given the company’s small user base and asset light approach to logistics. I believe Jumia is currently fairly valued based on the risks involved, but the range of possible outcomes is highly dispersed. This may not matter while the company’s fundamentals are improving, though, particularly if Jumia can start generating robust growth again.
Figure 8: Jumia EV/S Ratio (source: Seeking Alpha)
