Jumia: Currency crises create clouded outlook (NYSE:JMIA)

Jumia Technologies AG (NYSE: JMIA) second quarter was weak, both in terms of sales and margins, and the blow to investors was compounded by the company’s decision to raise capital in a market offering. Jumia’s current struggles are largely due to macro conditions, including currency instability in Egypt and Nigeria.

We previously suggested that improving growth prospects could continue to drive Jumia’s share price higher. While Jumia’s share price doubled in the months following that article, it is now down more than 30%. We also highlighted the macro risks facing Jumia, but at the time we felt that changes in government and central bank policy could improve the currency’s stability.

While the underlying trends in Jumia’s business continue to look promising and the company’s valuation is reasonable, the risks to which investors are exposed are generally undervalued. Like a as a result, it’s difficult to get excited about Jumia stock unless the currency rates show signs of greater stability.

Market conditions

Jumia’s investment thesis is generally centered on the potential size of the e-commerce market in Africa, rather than anything specific to Jumia. Africa is expected to account for approximately 25% of the world’s population by 2050, and mobile device adoption and improved infrastructure are driving increased internet penetration. As a result, Jumia could deliver high growth rates over a long period of time. There are barriers to adoption, which we previously discussed in detail, however. As a result, I tend to believe that end market growth will be more modest than many expect.

Outside of the company’s long-term potential, Jumia continues to face short-term headwinds, primarily currency devaluations in Egypt and Nigeria. These countries face problems such as high external debt, shortage of foreign exchange, extremely high inflation, high unemployment and weak economic growth.

Egypt is affected by the war in Gaza and remittances have dropped significantly. The government also embarked on an aggressive infrastructure program, which contributed to inflation and added to the country’s debt. Nigeria has struggled to maintain oil production in recent years, a situation that has been exacerbated by weaker prices. Large parts of Nigeria are also outside the government’s control.

Both countries are taking steps to try to remedy this situation, including:

• Currency devaluation.
• Coin float.
• The IMF bailout 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. However, it is not clear whether these measures will be enough to stabilize the currencies.

Jumia Business Updates

Jumia operates an e-commerce marketplace that is powered by its logistics services and JumiaPay. The company has been operating in Africa for over 10 years and yet the number of quarterly active customers has stabilized at around 2 million in recent quarters. The inability to penetrate more deeply into the large populations of the countries in which they operate is worrying.

Jumia has suggested that supply has been constraining growth in some countries and it is trying to improve and diversify its product range to remedy the situation. This includes improving sourcing from Chinese suppliers and expanding the team in China. The number of employees in Shenzhen has increased by 21% compared to last year, and Jumia plans to open new sourcing offices across the country.

Jumia is mostly focused on cost management and improving cash utilization at the moment. Much of this is his attempt to improve marketing efficiency, which includes creating a higher quality customer base (improved retention and higher spend). Jumia’s 90-day redemption rate for new customers rose 2.6% year-on-year in Q2 to 36%.

Marketing spend has shifted to more effective channels (radio/print, localized marketing notifications) and Jumia is driving improvements in areas such as SEO. The percentage of physical goods orders benefiting from customer incentives also fell from 50% in Q2 2022 to 28% in Q2 2024. However, this figure has been relatively stable over the past year.

Jumia opened two new warehouses in the second quarter, one in Nigeria and the other in Morocco, with the aim 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 improved logistics productivity 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 from secondary cities versus capital cities is now 53% compared to 48% last year.

Increased use of pick-up stations was a factor in improving logistics efficiency. The percentage of orders fulfilled through pick-up stations increased from 42% to 55% in the last year. In secondary cities, 73% of orders are fulfilled through pick-up stations.

Financial analysis

Jumia’s GMV in constant currency grew 35% year-over-year in the second quarter, its third consecutive quarter of growth. This growth is also quite widespread, with six of Jumia’s countries producing GMV growth. In USD, GMV decreased by 5% due to currency devaluations in Nigeria and Egypt. Jumia’s revenue also fell 17.2% year-on-year to $36.5 million.

The number of consumers and the number of orders per consumer are stabilizing after several years of decline. Orders rose 6.9% year over year in the second quarter, while the average value of orders for physical goods fell 7.1% year over year. The decrease in average order value was attributed to a change in category mix, driven by improved sourcing from Chinese suppliers. Jumia posted strong growth in fashion in Q2, alongside solid performances in home and home and electronics.

Jumia does not provide revenue guidance at this time, but expects both orders and GMV to grow in 2024, excluding currency impact. Although there is a large opportunity for growth, Jumia’s GMV has remained constant over the past 7 years, although the company has still managed to grow revenue. There are a lot of reasons for this, but Jumia needs to attract more consumers to its platform and increase GMV to demonstrate that it can capitalize on the opportunity.

In constant currency terms, first-party revenue was up 4% year-over-year and marketplace revenue was up 27%. Primary sales were hurt by lower corporate sales in Egypt, while market revenues were helped by higher commissions. Fee growth relative to the rest of the business has been an important driver of profitability in recent quarters.

Jumia’s gross profit fell 5.7% year-on-year in the second quarter to $21.6 million, although it rose 34.5% at constant currency. 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 its cash burn. Jumia’s quarterly cash burn was just $8.7 million in Q2 2024, while CapEx was $0.7 million.

The company has been particularly successful in reducing manufacturing and sales and marketing expenses through the initiatives discussed above. However, delivery costs were higher in the second quarter, primarily due to fuel costs, which are priced in USD. Jumia has also significantly reduced its general and administrative expenses by reducing the number of employees, among other measures.

Jumia’s liquidity position was $92.8 million at the end of the second quarter. Given Jumia’s recent cash burn rate, this should have provided something like a 1-2 year runway and could have been considered sufficient for the company to break even.

As a result, it was somewhat surprising that Jumia chose to raise capital in an IPO. This was successfully completed, delivering gross revenues of nearly $100 million, resulting in 20% dilution. It’s hard not to feel that this increase was made in preparation for a long period of weakness.

Conclusion

Rapid changes in exchange rates make it difficult to assess what is happening to Jumia’s business. While I think Jumia’s second quarter was much better than the financials suggest, that probably doesn’t matter while economic uncertainty remains high.

Egypt and Nigeria are taking steps to try to stabilize their exchange rates, but it is too early to tell if this will be effective in the 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 over the past few quarters, I continue to feel that the company is unable to claw its way back to profitability. The increase will likely be necessary for Jumia to start generating significant free cash flow.

Even assuming Jumia can return to growth and transition to profitability in the next few years, I wonder if the bull case will play out in a reasonable timeframe given 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 drop in share price, Jumia now looks more reasonably valued, especially given the robust growth analysts currently expect in 2025 and 2026. However, achieving that growth will largely depend on macro conditions and currency stability. I tend to think that currency risks and the rising risk of a global recession still make Jumia an unattractive investment opportunity at this time.