Jumia Technologies AG (JMIA US) first full-year results (FY19) were touted by management as positive. 4Q19 exceeded consensus by 8%. The number of active consumers rose 54%. GMV was up 6% YoY.
The stock is now almost unchanged since the results at US$3.84, after popping 10% immediately after their release. Our target price remains US$4.00. Management should focus on three issues to assuage investor fears in a stock that is down 81% since its listing last year.
1. It is the cashflow, stupid!
Jumia's management has been projecting its revenue and GMV expansion. It also touts its active consumer numbers.
However, the principal issue with Jumia is its unsustainable cash burn. The company is gravely cashflow negative. We are worried about its viability. The current burn rate suggests that Jumia's cash level will be almost depleted by FY21. By FY22, another capital raise would be required. Its operating margins and inventory margins may improve, but that would be insufficient.
Jumia is at the bottom of our proprietary Cash Sustainability Index, which rates the cashflow potential of e-commerce players.
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2. Fraud allegations must be addressed
Jumia has not assuaged the concerns about the impropriety of its employees and agents. In 3Q19, it was revealed that employees and agents had engaged in the fabrication of revenue. The employees and agents have been terminated. The quantum of the fraudulent activities constitutes 4% of 1Q19 sales, but they are a much larger proportion of gross margins. These revelations seem to support some of the claims made by Citron, a short-seller, that accused Jumia of widespread fraud earlier this year.
3. When will the cash burn turn?
In our initiation report we described how Amazon successfully reversed its negative cashflow situation in 2001. It was able to renegotiate its working capital arrangements with suppliers.
Jumia needs to provide investors with some indication of a change in its working capital situation. If not, the market will continue to view the cash burn with trepidation.