What happened
Shares of Jumia Technologies (NYSE: JMIA) jumped as much as 33.6% this week, according to data from S&P Global Market Intelligence. The African e-commerce company reported better-than-expected earnings, driving investors to bid up the stock. As of this writing, shares are up 22% this week.
So what
Jumia reported its second-quarter earnings on Aug. 10. Revenue grew 42.5% year over year to $57.3 million. This was driven by a 25% growth in active customers to 3.4 million and a 31% growth in total payment volume (TPV) to $74.2 million. The revenue growth was better than analysts expected for the period, a big reason Jumia's stock price jumped the day after the results came out.
While revenue growth looked solid, profitability has still been hard to find for this company. Gross profit only grew 13.6% in the period to $30.4 million and operating loss was $67.7 million, or over 100% of revenue. Operating loss widened from $51.6 million in the year-ago period.
It is also possible that Jumia's stock was up so much this week because of a large short squeeze on the stock. With the stock down over 50% this year (even after the huge recovery this week), it is likely many professional investors had shorted some shares. If they closed their positions and bought back the stock, this could have put even more upward pressure on Jumia's share price this week.
Now what
Don't get fooled by this rising share price. Jumia is a severely unprofitable business that doesn't belong in anyone's portfolio. The company is hemorrhaging money with its e-commerce model and is seeing no signs of operating leverage. Losing over 100% of your revenue in a quarter is never a good sign. Or, put it another way, when gross profit barely covers fulfillment expenses, there's not a lot of room to pay for employees in sales, technology, and executive roles. This makes Jumia's business model entirely unsustainable.
With $351 million in liquidity, Jumia has a decent runway to continue losing money. But once this runs out, it is either going to have to raise a ton of cash from the capital markets or file for bankruptcy. Unless you think Jumia will miraculously fix its cost structure within the next few quarters, it is best to stay away from this stock right now.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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