Jumia Shows Some Great Potential, but JMIA Stock Is Really Stretched

Jumia Technologies (NYSE:JMIA), which operates an e-commerce platform and mobile payments system in Africa, has suddenly become a darling on Wall Street. Note that JMIA stock has gone from $8 in September to about $65. The market capitalization is roughly $5.8 billion.

Source: Christopher Penler / Shutterstock.com

The company was smart to capitalize on this run-up. In early December, Jumia pulled off an “at the market” offering of shares, raising $243.2 million. This was certainly critical as the balance sheet needed a boost.

About eight years ago, Jeremy Hodara and Sacha Poignonnec started Jumia. They both had extensive experience working a McKinsey, such as for clients on areas like e-commerce and packaged goods.

This proved to be spot-on for developing Jumia, and the founder had little trouble raising money. While growth was strong in the early years, the company would ultimately get overextend forcing Jumia had to leave various countries as well as cut back on costs.

But despite all this, the platform is still robust. Jumia has 6.7 million annual active consumers and 110,000 active sellers. The platform also has a wide array of top brands like PepsiCo (NASDAQ:PEP), Unilever (NYSE:UL), HP (NYSE:HPQ), Samsung and Intel (NASDAQ:INTC).  This has been key for generating engagement.

For the most part, the African market has been neglected by the large e-commerce players. Instead, the focus has been more on India and parts of South America.

Yet Africa is certainly an attractive opportunity. The population is 1.3 billion and there are 523 million Internet users. Consumer spending is over $4 trillion. There are also 17 million small and medium-sized businesses.

The Jumia Stock Growth Story

Growth has been choppy for Jumia. During the latest quarter, the GMV (Gross Merchandise Value) was actually down 28% on a year-over-year basis to 187.3 million euros, but it is important to keep a few things in mind.

First of all, Jumia has been changing the mix of its product line towards higher-margin items and has streamlined the business model. Next, the company has been taking steps to realize efficiencies. In fact, a big part of this has been the leveraging of artificial intelligence and machine learning.

In other words, the strategy is to pursue profitable growth. And for the most part, the company is getting results. In the quarter, there was a 22% improvement in gross profits on a year-over-year basis.

Something else to note: The mobile payments business is showing lots of momentum. As seen with the companies like Square (NYSE:SQ) and PayPal (NASDAQ:PYPL), this can be a lucrative category – and can be big in terms of driving shareholder value. In the quarter, Jumia reported its payments platform grew by 50% to 48 million euros.

Bottom Line on JMIA stock

The hope is that Jumia will become the Amazon (NASDAQ:AMZN) of Africa. Yet this is probably too optimistic. If anything, as the African market starts to show more progress, e-commerce giants like Amazon and Alibaba (NYSE:BABA) will probably target the opportunity. Such companies do not necessarily need to be first-movers to get a big share of the market.

Besides, when it comes to JMIA stock, it looks as if the valuation is stretched. Of course, we’ve recently seen speculative activity come into the markets, such as with GameStop (NYSE:GME) and AMC (NYSE:AMC).

JMIA stock is trading at a nose-bleed 26 times revenues, so it’s probably best to hold off and wait for a more reasonable valuation for the time being.

On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence BasicsHigh-Profit IPO Strategies and All About Short Selling.  He is also the author of courses on topics like the Python language and COBOL.

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