After it went public in 2019, investors largely stayed away from African e-commerce play Jumia Technologies (NYSE:JMIA) stock. But, with investors in 2020 willing to pay up for “story stocks,” shares went on a tear in the latter half of the year. But, while many have coined this Africa’s answer to e-commerce powerhouses like Amazon (NASDAQ:AMZN) and Alibaba (NYSE:BABA), it’s debatable whether it’ll live up to the comparisons.
On one hand, while its still a small company (trailing twelve-month sales stand at $172.5 million), the company’s growth runway could be massive. As the emerging economies of Africa expand, this company stands to benefit from its first mover advantage.
On the other hand, it’ll be many years before its strategy pays off. And, with Covid-19 still negatively affecting the continent’s major economies, the timeline to success may wind up being longer than anticipated.
Another concern with JMIA stock is valuation. At today’s prices, investors have priced-in much of its potential. If 2021 results fail to set the world on fire, shares could easily crater back to the $10-$20 per share range. Yet, I can see the opposite happening as well. With the stock’s high short-interest, this has become a crowded trade on the short-side. All it’ll take is a modicum of good news to cause an epic short squeeze.
With this in mind, going short may not be the best move. But, with the stock way ahead of itself, those who bought in before it surged should take the money and run.
JMIA Stock: Bull Case vs. Bear Case
Our own Louis Navellier and Matt McCall have taken divergent views on Jumia. Navellier bases his bull case on Africa’s long-term growth potential. The fast growing continent’s e-commerce sales could hit $75 billion per year by 2025. With Africa’s surging population, and untapped economic potential, long-term things bode well for Jumia.
And, given its a first mover in these emerging and frontier markets, it’s set to reap the most benefit from this megatrend in the making. However, while this bull case makes JMIA stock sounds like a slam-dunk opportunity, consider McCall’s opposing view on its prospects.
Namely, the fact Jumia’s work remains cut out for it. Sure, long-term, e-commerce is set to explode in Africa. But, in the meantime, this company faces many hurdles on the road to success. Some of this is due to existing infrastructure challenges. But, unlike with Amazon in the U.S., and Alibaba in China, Covid-19 has produced more headwinds than tailwinds for Jumia in Africa.
Yes, the company has narrowed its operating losses. But, as it admits itself in the last earnings presentation (page 8), “this progress was achieved with limited to no tailwinds from Covid-19.” But, while so far it’s been largely a wash, the pandemic could still be a negative for Jumia in the coming year. How so? Coronavirus variants in both of the continent’s largest economies (Nigeria and South Africa) could delay an overall recovery.
In short, the jury’s still out whether this early-stage company will become the next Amazon. Or, whether it will fall far short of expectations. But, that hasn’t stopped investors from pricing it at a premium valuation.
Valuation Looks Frothy, But Beware of A Short Squeeze
Although Jumia hasn’t seen pandemic tailwinds, investors buying on the headlines have priced it like it is. With the stock’s nearly 580% move higher since July, it’s safe to say shares today are “priced for perfection.”
At today’s valuation, investors have largely priced-in its potential to live up to the aforementioned “Amazon of Africa” moniker. If results in the coming quarters show otherwise, those who bought in last year could start to head for the exits.
If speculation cools off further, expect JMIA stock to fall back towards prior price levels. Then again, maybe not. While this stock has many bulls (including former bears such as Citron Research), the short side has gotten crowded as well.
With around 41.4% of its outstanding float sold short, any sort of positive news could cause a short squeeze. If the shorts have to scramble to cover their positions, not only could shares rebound from around $35.50 per share today, back to its highs of $49 per share. A move up to $60 per share may not be out of the question.
The Verdict? Sell Into Strength, But Don’t Go Short
It’s going to take many years for the growth story with Jumia to play out. Especially as Covid-19 headwinds continue. But, despite this, and the stock’s “priced for perfection” valuation, it’s not wise to join the bears and go short.
Yet, if you bought in before this became a “hot stock,” it’s high time to cash out. Sell into strength with JMIA stock.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single-stock analysis columns since 2016.