Driving the narrative for emerging markets is the fundamental reason why people invest: Find a great deal in the hopes that it will generate significant profits later. Naturally, those that love the concept of banking on emerging markets have gravitated toward companies like Jumia Technologies (NYSE:JMIA). As an e-commerce firm targeting several African countries, much of the region is one giant frontier market, presenting an excellent potential return profile for JMIA stock.
For some contrarians, Jumia is akin to a time capsule opportunity. For instance, during the immediate post-World War II period, astute investors banked on Germany and Japan. Obviously, these two nations were starting over at rock bottom; therefore, the profitability potential was enormous. The same principle applies to China in the late 1990s. A new generation of contrarians saw the burgeoning growth of the capitalist spirit and profited handsomely from it.
Having witnessed the miracle of the Chinese economic boom — where names like Alibaba (NYSE:BABA) and Tencent (OTCMKTS:TCEHY) are household names — the latest cohort of forward-thinking investors want to find the next big thing. That would be Africa, a continent rich with natural resources and abundant upside potential. Among the burgeoning list of relatively reliable investments levered to the region is JMIA stock.
According to Worldometers.info, the African population numbers 1.37 billion people. Further, amid declining birth rates in major developed nations, the continent features a yearly population growth rate no lower than 2.45% since 2000.
As you might imagine, the continent is young, with a median age of 19.7 years. Further, experts estimate that even by the year 2050, the continent’s median age will still be under 25 years. That’s simply amazing, fundamentally bolstering the case for JMIA stock.
Still, it begs the question, why are shares underperforming on such supposedly positive fundamentals?
Look Beyond the Headlines with JMIA Stock
After an auspicious start to 2021 — at one point, JMIA stock was up nearly 84% for the year — Jumia has given back all of its gains and then some. Compared to the first closing price of January, JMIA is down almost 7%. Further, from this year’s peak close, shares are down 49%. What gives?
For one thing, JMIA stock is overvalued. Currently, Jumia trades at nearly 17-times sales, whereas the retail industry has a median price-sales ratio of 0.87x. Further, Jumia is priced at nearly 11-times book value, while the underlying industry median is at less than 2-times book.
Making matters worse, its most recent fiscal statement for the quarter ended Dec. 31, 2020 shows revenue of $50.8 million. This is down 7.3% from the year-ago level. Granted, the company is recovering from the novel coronavirus pandemic. Moreover, it’s not fair to compare Africa’s response to Covid-19 versus developed nations.
Still, the overvalued nature of JMIA stock combined with its financial underperformance (as understandable as it may be) represents serious concerns for investors. As an example, trading on margin in the U.S. is at all-time highs. This is a frothy market and could experience a correction. If so, something like Jumia may suffer severe volatility due to its higher-risk profile.
But the most critical headwind affecting JMIA stock is likely the poor fundamentals and infrastructure of the African continent. Take education for example. Nigeria, one of Jumia’s key markets, has long had persistent gender inequality. Further, Voanews.com reports that the pandemic widened this inequality.
This isn’t to pick on Nigeria because many other neighboring countries experience similar inequities. As well, the United Nations reports on the challenges of attempting to close Nigeria’s extreme wealth gap. Frankly, the continent must address these gross injustices before enterprises like Jumia can become successful.
Potential Is a Double Axis Metric
Of course, the nagging issue with JMIA stock is that the underlying company has significant upside potential. That’s because the continent itself can become an emerging market, perhaps even a developed one.
If investors assessed potential strictly on a single axis, I have no doubt that everyone would be buying JMIA stock. Unfortunately, potential is necessarily a double axis metric because we humans have an expiration date. In other words, the question isn’t so much what but when?
Apparently, no one has a good answer for that. Generally, analysts agree that the market is getting frothy and that investors should consider de-risking some portion of their portfolio. In this environment, JMIA is too much of a risky narrative without much hope for substance in the nearer term.
Thus, shares are declining, and this might not be the end of the volatility. Personally, I’d stay away from Jumia for now.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.