This article was written exclusively for Investing.com

Purely from a fundamental perspective, Jumia Technologies (NYSE:) stock looks like a zero, or something close. Indeed, the financial performance of the online marketplace operator which operates in Africa, the UAE and Europe suggests that the business simply does not work.

To be fair, investing is not about fundamentals alone. And if an investor understands why the performance of the e-commerce platform looks so dismal, and its strategy for improvement, there is a case to be made for JMIA stock near the current $6 level.

But it’s a case that will take some time, some patience, and in this market likely some volatility.

Rumors surrounding a possible acquisition don’t make a ton of sense; nor does the case that the Jumia business is available “for free.” The upside in JMIA likely doesn’t come from making a quick buck, but from riding the stock out for the long haul.

Ugly Fundamentals

Over the past four quarters, Jumia has generated of $193 million. It’s spent $151 million simply on general and administrative expense. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) loss over that period has totaled $220 million.

In other words, Jumia is losing more than a dollar on every dollar in revenue even before stock-based compensation ($37 million, almost 20% of revenue) or capital expenditures (over $8 million).

Jumia still is in growth mode. But the company was founded a decade ago; it’s not exactly a startup.

Bulls like to compare Jumia to Amazon (NASDAQ:); but in 1999, five years after its founding, Amazon generated $1.6 billion in revenue.

Ten years on, over the past four quarters, Jumia’s Gross Merchandise Value (GMV) (the amount of sales actually generated through the platform, not all of which are booked as revenue for Jumia) was a little over $1 billion.

Still, $1 billion-plus in GMV seems positive. So does the fact that EBITDA margins for Amazon in 1999 and Jumia now (again, using GMV for Jumia instead of revenue) are in the same ballpark, a little worse than negative 20%.

But Amazon also grew revenue 169% year-over-year in 1999. In 2021, Jumia’s revenue increased just 12%; GMV was up only 4%. It’s almost impossible to combine selling at such a steep loss and yet somehow not growing revenue.

Jumia’s balance sheet admittedly is in good shape. The company finished the first quarter with $89 million in cash and $333 million in term deposits and other short-term, relatively liquid assets. Borrowings are minimal (just $12 million).

Jumia only has a market capitalization of $618 million at the moment. And so the operating business in theory is being valued at about $200 million.

The problem with that argument, however, is that Jumia is burning so much cash. Free cash flow in the first quarter was negative $77 million. Whatever the asset-based case for the stock is now, it’s going to be worse two quarters from now, and so on.

Again, looking at JMIA purely from a quantitative perspective, there’s not much good news here. Steep losses and minimal growth, even with a strong revenue performance in Q1, suggest minimal value for the stock.

Citron Makes The Case

Before the dramatic early 2021 rally in GameStop (NYSE:) and other heavily-shorted stocks, Citron Research was a well-known short seller. Perhaps its most well-known and effective campaign came against Valeant Pharmaceuticals, now Bausch Health (NYSE:), which Citron’s Andrew Left accused of “channel-stuffing.”

Valeant stock plunged and investigations and fraud convictions followed.

After GameStop, Citron exited the arena. But Left occasionally released bullish calls—including several on Jumia. In December, for instance, Left that JMIA could reach $22.

With JMIA below $7, clearly that forecast hasn’t panned out. But Left and Citron remain behind the stock. This month, Left argued that Amazon would buy Jumia this year. Last month, he tweeted—presumably in reference to the cash balance—that the business was available for “FREE” (caps in original).

With all due respect to Citron, neither argument seems all that well-founded. As noted, Jumia does have a lot of cash now, but almost certainly won’t in a year. (The only way it will is if it chooses to sell more stock and dilute current shareholders further, which isn’t good news and also inflates the market capitalization.)

As for Amazon, the e-commerce behemoth reportedly is planning to enter Nigeria and South Africa next year. But it’s not at all clear why the company needs to acquire Jumia to do so. Amazon has decades of logistics experience, a brand known worldwide, and no real need to pay for Jumia’s assets or fund its ongoing losses.

It’s possible a deal arises, certainly, but the logic isn’t there. Amazon presumably could just outspend and outcompete Jumia in its newest markets, the same way it has with most e-commerce challengers over the past three decades.

The Case for JMIA Stock

Again, there is a reason to buy Jumia. But it’s not based on an acquisition, or on the business being available ‘for free.’

Rather, the case is that Jumia is in the middle of an exceptionally long investment phase.

The core problem of being an e-commerce player in Africa is that the infrastructure simply isn’t there. Whether it’s roads, warehouses, internet access or even labor, Jumia and other rivals aren’t operating under the same conditions as their older, Western counterparts.

So it will take Jumia longer to get to where those businesses did. Yet if the company can do so, if it can start narrowing losses and provide some confidence that it can be a pan-continent online behemoth, the upside from the current valuation is enormous.

The contingencies there are numerous. It’s not as if Jumia has the market to itself: competitors include Konga, owned by billionaire Sim Shagaya. The current cash burn rate will exhaust the company’s balance sheet in less than two years. The company’s pivot away from a business that was heavily reliant on mobile phones to a broader assortment requires more inventory and thus more capital.

At some point, there will be an e-commerce giant in Africa, and likely more than one. But Jumia is far from guaranteed to be one of the survivors, particularly with Amazon now moving in.

The risks are huge. So are the rewards. It’s likely going to take time—as in years—for investors to know which direction JMIA stock takes.

Disclaimer: As of this writing, Vince Martin has no positions in any securities mentioned.


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