Jumia Technologies Q2 Earnings: Still Overvalued Despite The Plunge (NYSE:JMIA)

Jumia Technologies Overview

My initial bearish thesis about Jumia Technologies AG (NYSE:JMIA) did not age well as the stock rallied by almost 82% over the last 12 months even despite today’s massive around 50% intraday plunge after weak earnings release.

The massive rally in 2024 is explained by robust Q1 2024 earnings, but it appears that today’s earnings release notably cooled investors’ optimism. The Q2 performance was indeed weak with negative dynamics across most of the vital business and financial metrics. Moreover, my valuation analysis suggests that the stock is still overvalued even after today’s carnage. All in all, I reiterate my “Strong Sell” rating for JMIA.

Recent Developments

Jumia Technologies released its Q2 earnings today. The company’s Q2 revenue of $36.5 million missed consensus estimates by $8.6 million and is 17% lower on a YoY basis. The company continues delivering negative EBITDA and operating cash flow, which is a red flag for me. On the other hand, the management reaffirmed its FY 2024 guidance and said that it is still committed to driving down costs.

The GMV dynamic is negative, and the latest earnings presentation suggests that the YoY active customer change is also negative. The number of users and the GMV are one of the most crucial business metrics for an e-commerce company and having negative change in both of them is another red flag.

JMIA bulls might say that I am too pessimistic as revenue grew by 15% YoY in constant currency [cc], but I prefer to ignore cc dynamics since the stock price is denominated in dollars and there is no cc adjustment for the stock price. The massive gap between the USD and cc revenue dynamics is explained by devaluations in Egypt and Nigeria.

As a result of still negative profitability, the company’s liquidity position keeps deteriorating. Liquidity position decreased by $8.7 million in Q2, which is a negative development as well. A company that is unprofitable is unlikely to get debt on favorable terms. Therefore, it is likely that the company will raise cash by issuing new shares and this could further dilute shareholders’ value.

The picture does not look better from the macro perspective. Several large African economies are experiencing turbulent times. For example, the IMF recently downgraded its economic growth forecast for Nigeria in 2024. Early this year, Moody’s downgraded Egypt’s outlook from stable to negative due to concerns about the country’s credit profile. Ghana is another important market for the company, and its economy is in the “worst economic crisis”. Economic instability in Jumia’s key markets does not only adversely affect its growth potential, but also significantly undermines the strength of local currencies against the USD, and this is another significant risk for investors in African assets.

JMIA Stock Valuation Update

JMIA stock rallied by 55% flat year-to-date, outperforming the broader U.S. market. Seeking Alpha Quant assigns the stock an average “C” valuation grade, though several multiples are inapplicable due to negative profitability. JMIA’s forward price-to-sales ratio is 5.7, almost six times higher than the sector median. This might suggest a substantial overvaluation, but I need more evidence.

Therefore, let me proceed with the discounted cash flow [DCF] approach. I use an elevated 15% WACC because the company operates outside the U.S., and there is high uncertainty regarding when the company will turn profitable. I have revenue consensus estimates available up to FY 2025. For the years beyond, I have implemented a 10% revenue CAGR. The FCF margin is the hardest to project because the company currently has a massive negative metric. I consider JMIA turning positive from the FCF margin perspective not earlier than FY 2027 with 150 basis points further yearly expansion would be fair.

Even after today’s 50% massive stock price drop after the earnings release, the stock still looks overvalued. Even if I ignore the cash burn rate and include the current liquidity position in my DCF calculation, the stock is still around 11% overvalued.

Risks to Bearish Thesis

My initial bearish thesis did not age well, and that is the main risk that I might be wrong again. This year’s rally suggests that investors are ready to react with massive optimism, even if it is a one-off quarter of strong performance. The market is a voting machine over the short term, and an unexpectedly strong earnings release next quarter might boost another rally wave again.

Moreover, I also had a bitter experience with my other bearish articles about fundamentally weak companies. However, large reputable companies suddenly bought stakes or provided financing, which ensured massive short-term rallies for these stocks. That said, there is a possibility that some reputable investors might select Jumia as an investment target, which might make the stock price jump. These are the only two probable risks that I see for my bearish thesis, given the very weak fundamentals.

Bottom Line

To conclude, JMIA still looks like a “Strong Sell” to me, even despite my initial thesis not aging well. The Q2 performance is quite poor, and the valuation is certainly not attractive.