Jumia Shares Drop 17% After Q2 Results, Investors React

Jumia once called the “Amazon of Africa” just released their financial results for Q2 & they are not looking good. The former unicorn, has stopped growing & is facing challenges that could bring down one of the most hyped start-ups from Africa.

The first concern is the -15.4% decrease in revenue combined with a operating loss of $23m. Usually a company has a revenue or profit problem, Jumia has both. That’s like a football team that can’t score goals and also can’t defend.

Jumia has always made huge losses. What saved it in the past was the African growth story. Even in their 2019 IPO prospectus the word “growth” appeared over 100 times e.g. in one section alone Jumia mentions growth 10 times (yellow highlights).

But now Jumia is not growing and the only “good news” is that it is losing less money than before. However, this improvement is driven only by brutal cost cutting measures with expenses down -47%.

Jumia’s most tricky problem however is going to be cash…

Jumia has $166m in cash, which, if the Q2 cash utilization of $38m continues, will last ~13 months. While this doesn’t always mean disaster (Jumia has been there before), there is a significant difference this time that changes everything – the stock price.

In 2020, Jumia was low on cash. Fortunately its stock was flying so they issued shares & raised $231m at $30.51 per share. They did this again a few months later in 2021, and raised $341m at $38.90 per share. Their stock had helped them raise $571m in cash in a few months.

Now however, Jumia’s stock price has crashed from $38.90 to $3.05 (+90% drop). The shares issued in 2020-21 that raised $571m, would today raise less than $57m which wouldn’t last 6 months. Also investors who had bought shares made big losses & so less likely to be interested.

Jumia could theoretically try raise cash from debt financing e.g. from banks. However even they mention that this is unlikely due to history of losses, negative cashflows etc.

So with both issuing new shares and debt financing being challenging what options does Jumia have?

Cut costs and try stay alive for as long as possible. This is exactly what Jumia is trying to do. Jumia has been incredibly aggressive on cost reductions e.g Sales & Advertising expenses down 74% compared to last year.

Jumia is so focused on cost reduction they have even adjusted their EBITDA guidance to indicate they will save ~$10m more than planned.

I also think was done to show some element of progress to investors amidst all the bad news.

But will all these measures work?

Ironically I wrote about cost cutting this week in another thread and the principle still applies. Cost cutting cash only take you so far. Ultimately you need to deal with the underlying business issues.

This is where my concern is…

Management is taking the right steps but may have inherited a fundamentally flawed business. I reconstructed a Quarterly P&L using historic best performance for each line. This is represents the perfect case scenario but even with that Jumia is still loss making.

This leads me to thinking that Jumia might be structurally unprofitable, like a business selling $100 bills for $50. It will grow and have lots of demand, but you can never make it profitable. At best, you can decrease the losses – which seems to be what Jumia is doing now.

The key lesson here is that, although growth is crucial, especially for startups, it should not be assumed that growth and scale will automatically lead to profitability.

If you can’t deliver on profit you will eventually have to pay for it.

By Tinashe M Tmukogo