Jumia Technologies AG’s (NYSE:JMIA) second quarter was poor, both in terms of sales and margins, and the blow to investors was compounded by the company’s decision to raise capital in an at-the-market offering. Jumia’s current struggles are largely due to macro conditions though, including currency instability in Egypt and Nigeria.
I previously suggested that improving growth prospects could continue to drive Jumia’s share price higher. While Jumia’s share price more than doubled in the months after that article, it is now down by over 30%. I also highlighted the macro risks that Jumia faces, but at the time I felt that shifts in government and central bank policy could improve currency stability.
While the underlying trends in Jumia’s business continue to look promising, and the company’s valuation is reasonable, the risks that investors are exposed to are generally underrated. As a result, it is difficult to get excited about Jumia’s stock unless foreign exchange rates show signs of greater stability.
Market Conditions
The Jumia investment thesis is generally centered around the potential size of the e-commerce market in Africa, rather than anything specific to Jumia. Africa is expected to account for around 25% of the World’s population by 2050 and mobile adoption and improved infrastructure are driving increased internet penetration. As a result, Jumia could offer high growth rates over an extended period of time. There are barriers to adoption, which I have previously discussed in detail, though. As a result, I tend to think end-market growth will be more modest than many expect.
Outside of the company’s long-term potential, Jumia continues to face serious short-term headwinds, primarily currency devaluations in Egypt and Nigeria. These countries are struggling with issues like large external debts, a shortage of foreign currency, extremely high inflation, high unemployment and weak economic growth.
Egypt is being impacted by the war in Gaza and remittances are down significantly. The government has also embarked on an aggressive infrastructure program, which has contributed to inflation and added to the country’s debt. Nigeria has struggled to maintain oil output in recent years, a situation that has been exacerbated by weaker prices. Large parts of Nigeria are also outside of the government’s control.
Both countries are taking actions to try to remedy this situation, including:
- Currency devaluation.
- Floating the currency.
- IMF rescue package and a UAE-engineered investment deal for Egypt.
- Higher interest rates (> 25% in both countries).
This is expected to help control inflation and make exports more cost competitive. It is unclear whether these measures will be enough to stabilize the currencies, though.
Jumia Business Updates
Jumia operates an e-commerce marketplace which is enabled by its logistics services and JumiaPay. The company has been operating in Africa for over 10 years and yet, its quarterly active customer count has stabilized at around 2 million in recent quarters. The inability to more deeply penetrate the large populations in the countries in which it operates is concerning.
Jumia has suggested that supply has been a constraint on growth in some countries, and it is trying to enhance and diversify its product assortment to remedy the situation. This includes improving sourcing from Chinese vendors and expanding its China team. Headcount in Shenzhen is up 21% YoY and Jumia is planning on opening new sourcing offices across the country.
Jumia is largely focused on cost management and improving its cash usage at the moment. A large part of this is its attempt to improve marketing efficiency, which includes creating a higher quality customer base (improved retention and higher spend). Jumia’s 90-day repurchase rate for new customers increased 2.6% YoY in Q2 to 36%.
Marketing spend has shifted to more efficient channels (radio/print, localized marketing notifications) and Jumia is driving improvements in areas like SEO. The percentage of physical goods orders benefitting from customer incentives has also declined from 50% in Q2 2022 to 28% in Q2 2024. This figure has been relatively stable over the past year, though.
Jumia opened two new warehouses in the second quarter, one in Nigeria and the other in Morocco, with the goal of consolidating operations, expanding capacity and improving productivity. Jumia also expects to open new warehouses in Egypt and Côte d’Ivoire in the near future.
As a result of logistics productivity improvements, and a shift in product mix, Jumia’s fulfillment cost per order continues to decline, even as the company expands into smaller cities. The mix of orders in secondary cities versus capital cities is now 53% compared to 48% last year.
Increased usage of pickup stations has been an improvement driver of logistics efficiency. The percentage of orders fulfilled through pick-up stations has increased from 42% to 55% over the past year. In secondary cities, 73% of orders are fulfilled through pickup stations.
Financial Analysis
Jumia’s GMV in constant currency was up 35% YoY in the second quarter, the third consecutive quarter of growth. This growth is also reasonably widespread, with six of Jumia’s countries delivering GMV growth. In USD terms, GMV declined by 5% due to currency devaluations in Nigeria and Egypt. Jumia’s revenue was also down 17.2% YoY to 36.5 million USD.
The number of consumers and the number of orders per consumer are stabilizing after several years of decline. Orders increased 6.9% YoY in the second quarter, while the average order value for physical goods declined 7.1% YoY. The decrease in average order value was attributed to a shift in category mix driven by improvements in sourcing from Chinese vendors. Jumia saw strong growth in Fashion in Q2, along with solid performance in Home & Living and Electronics.
Jumia isn’t providing revenue guidance at the moment but expects both orders and GMV to increase in 2024 excluding the impact of foreign exchange. While there is a large growth opportunity, Jumia’s GMV has been flat over the past 7 years, although the company has still managed to drive revenue higher. There are a lot of reasons for this, but Jumia must attract more consumers to its platform and grow GMV to demonstrate it can capitalize on the opportunity.
In constant currency terms, first-party revenue increased 4% YoY and marketplace revenue was up 27%. First-party sales were hit by reduced corporate sales in Egypt, while Marketplace revenue was aided by higher commissions. The growth in commissions relative to the rest of the business has been an important driver of profitability in recent quarters.
Jumia’s gross profit was down 5.7% YoY in the second quarter to 21.6 million USD, although was up 34.5% on a constant currency basis. Much of the recent improvement in gross margins has been driven by revenue mix.
Jumia has also been trying to cut costs and improve its profitability to reduce cash burn. Jumia’s quarterly cash burn was only 8.7 million USD in the second quarter of 2024, while CapEx was 0.7 million USD.
The company has had particular success reducing fulfillment and sales and marketing expenses through the initiatives discussed above. Fulfillment costs were higher in the second quarter though, primarily due to fuel costs, which are priced in USD. Jumia has also significantly reduced its general and administrative expenses through headcount reductions, amongst other measures.
Jumia’s liquidity position was 92.8 million USD at the end of the second quarter. Given Jumia’s recent cash burn run rate, this should have provided something like a 1-2 year runway and could have reasonably been considered sufficient for the company to reach breakeven.
As a result, it was somewhat surprising that Jumia elected to raise capital in an at-the-market offering. This was successfully completed, providing gross proceeds of almost 100 million USD, resulting in something like 20% dilution. It is hard not to feel that this raise was done in preparation for an extended period of weakness.
Conclusion
Rapid changes in exchange rates make it difficult to assess what is happening with Jumia’s business. While I think Jumia’s second quarter was a lot better than the financials suggest, this probably doesn’t matter while economic uncertainty remains elevated.
Egypt and Nigeria are both taking action to try to stabilize their exchange rates, but it is too early to know whether this will be effective long term. An end to inflationary pressures and a return to lower rates could also be on the horizon globally, which should help. There could be more pain before the situation settles down, though.
While I have been impressed by the improvements in Jumia’s business in recent quarters, I continue to feel that the company cannot just cut its way to profitability. Growth will likely be needed for Jumia to begin generating meaningful free cash flow.
Even assuming that Jumia can return to growth and transition to profitability over the next few years, I question whether the bull case will unfold in a reasonable time frame due to the challenges facing e-commerce in Africa. Jumia’s inability to consistently expand its extremely small user base is illustrative of this situation.
After the recent share price decline, Jumia now appears more reasonably valued, particularly given the robust growth analysts currently expect in 2025 and 2026. Achieving this growth will be heavily dependent on macro conditions and currency stability, though. I tend to think that currency risks and the growing risk of a global recession still make Jumia an unattractive investment opportunity at this point in time.
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