Don't Buy This Stock

Brit Ryle

Posted February 28, 2024

Jumia Jumps 50%—Don’t Buy It… Yet

I met my Pro Trader Today co-founders Dave Roberts and Christian DeHaemer in 1998. We were all in the early stages of our careers in this biz, learning the ropes at a publishing company in Baltimore.

We’ve golfed together, traveled together, gotten drunk together, gone skiing together, and my daughter and Christian’s firstborn went to each other’s birthday parties.

Now we’re in business together. 

Any business owner will say it’s not easy – but that doesn’t really cover it. It’s a lot of hard work with very little reward. That’s the cost of building something useful and valuable. I mean, come tax time, I’ll be able to tally my entire 2023 salary without taking off my shoes. There have definitely been bad days over the last 18 months where doubt crept in: “What am I doing? There’s no way I can pull this off…”

We’re friends, there’s no doubt we’ll enjoy the good times together. But those bad times, that’s what great partnerships were made for. We know each other’s strengths and weaknesses; we have complementary skills; and even when my own imposter syndrome flares up, I know in my bones that my boys are superstars.

Plus, I can now freely steal article ideas and themes from Christian with minimal repercussions. And that’s exactly what I’m going to do now. 

China’s Real Estate Problem

Last week, Christian talked about how demographics and population growth trends are critical factors for investors. For an economy to work right, you need a growing population—more people to buy more stuff so there are more jobs and wages can rise. 

As Christian pointed out, this simple formula explains America’s prosperity as the Boomer generation entered the workforce, had families, and bought houses.

It also explains the precarious situation that China is in. And it’s a big reason I’ve advised investors to avoid Chinese stocks for the last few years.

As Chris wrote, China’s current problem started with its one-child policy and now means that 500,000 fewer Chinese babies will be born this year than last.  

The Chinese government is now paying couples to have more babies. But it’s too late; the demographic die is cast. 

China put up incredible growth numbers for nearly two decades after it joined the WTO in 2001. China’s centrally planned strategy was to build its way to prosperity. Between 2011 and 2013, China poured more concrete than the U.S. did in the entire 20th century. 

The backbone of China’s economy is real estate. And it’s basically a Ponzi scheme. Families pool their savings and buy condos; developers take that money and build new condos. 

It’s now estimated that China has twice as many condos as there are people to buy them. It’s also estimated that Chinese people have over 50% of their savings invested in these condos. Developers are going bankrupt, half-finished new developments are being abandoned, and the population is in serious decline. Who’s going to buy those condos?

A large portion of China’s savings is at serious risk.

This isn’t going to end well. 

The Best Demographics in the World

From a continental perspective, Africa has the best demographics in the world. More than half of total global population growth over the next 25 years will occur on the African continent. From a macro perspective, it’s a good place to look for investments. 

Eleven days ago, a company called Jumia Technologies (NASDAQ: JMIA) reported earnings. There was a time when Jumia was called the “Amazon of Africa.” To the extent that Jumia is an e-commerce company that serves Africa, the name made sense. But unlike Amazon, Jumia has never been close to turning a profit.

Also, unlike Amazon, Jumia is not an all-encompassing marketplace. A new CEO came in a year ago and started cutting. Food was the big one; it’s very difficult to manage the supply chain for food, so Jumia dropped that business line. The focus is now on four categories: phones, electronics, home and living, fashion, and beauty, and the rollout of the payment system JumiaPay (for which transaction volume grew 41% in 2023). 

Jumia also cut expensive customer incentives such as vouchers and free shipping. Its primary markets are Nigeria, Egypt, Morocco, and Kenya.

The net result of the streamlining cut a $182 million EBITDA loss in 2022 down to $58 million in 2023. Cash burn dropped from a ridiculous $285 million down to $106 million.  

Jumia is making the right moves to get to profitability. That’s why the stock jumped 50% to $4.56 the day after earnings and climbed another 20% yesterday to ~$5.70. Still, the stock trades for less than 3X revenue, which is cheap considering it now has a pretty clear path to turning a profit as soon as 2025.  

One thing: Jumia currently has $147 million in cash. It will have to raise more cash, probably with a secondary offering of stock, like what we talked about on Monday. Given the ramp for the stock, I wouldn’t be surprised to see a secondary offering announced pretty soon.  

If you want to own shares of Jumia, follow the game plan for secondary stock offerings. You can buy the sell-off that occurs when the secondary is announced. Or you can lower your risk and wait for the price at which the secondary offering will take place. Companies that raise cash with secondary offerings usually find a floor at the offering price. 

That’s it for me today. Take care, and I’ll talk to you Friday,

 Briton Ryle

Chief Investment Strategist
Pro Trader Today