JMIA - Jumia

[cameronfen]

This is the number 1 e-commerce player in Africa (like the Amazon of Africa).  Recent IPO with lots of upwards momentum so maybe this makes me a momo trader.  To make me look even worse to the value investors here, I think one should ignore multiples when looking at this stock.  Right now its a 3.8 billion dollar company.  We know its the number 1 ecommerce player in Africa.  We know that ecommerce grants large moats and network effects to first movers.  The dominant e-commerce players in the US were Amazon and Ebay and they still are the dominant players.  Same with Alibaba in China and the same with Mercadolibre in South America.  This is a Rocket Internet company.  As such, they are going to copy all the ideas that worked in developed markets for ecommerce; including a payments platform like PayPal or Alipay; a classified section like Zillow, Monster, or Carvana (this is low priority I think just by what is said in the F-1 statement); and a logistics group like JD (this is especially important moat building in Africa where most places don't have a real FedEx player).  Africa has 1.2 billion people in it.  Jumia is currently operating in countries with 660 million people in total with the dominant position in most of these coutries.  China has about 1.6 billion people in it (Alibaba + Ant financial is worth about 540 billion dollars), South America has about 450 million people in it (Mercadolibre is worth 22 billion dollars and isn't in every country in SA).  India has about 1.3 billion people and Flipkart is worth 20 billion dollars.  Ebay+Paypal has a market cap of 130 billion.  Amazon has a market cap of 900 billion.  JMIA currently has a market cap of 3.8 billion dollars and looks like a steal compared to all these other players. 

 

A couple of problems: it's not growing as fast as it should given the maturity of the company: GMV grew from 500 million euros to 800 million euros.  That's fast growth but only 60% YoY for an e-commerce company with less than 1% penetration in the countries its in.  In response: a lot of people in Africa don't have the money to use ecommerce yet.  However, institutions are rapidly improving and Africa is set to grow at 6% a year for the foreseeable future.  I think likely this thing doesn't hockey stick but grows at 25-40% a year for a long time as the countries in Africa develops and the middle class expands. 

 

Still loss making, but EBITDA and earnings are rapidly improving.  Additionally unsurprisingly like all the other ecommerce companies that are more mature, gross margins to assets is very high (proxy for ROIC for companies that are still in the development stage). 

 

If you really want to look at multiples: trading at 25x revenue (yikes) growing revenue only at 40% a year (double yikes considering the revenue multiple) and still losing money.  Again IMO this is the wrong way of looking at this as when Amazon or even Alibaba where in the same stage as Jumia a large portion of of the population had the resources to use the service.  In Africa the GDP per Capita is below where China is even in 2008.  Also its likely Alibaba didn't have hyper growth until around 2003 or so as they were founded in 1999 and they were considered overvalued at 2007 while trading at 150 billion hong kong dollars (19b USD) (Source: https://www.marketwatch.com/story/alibabacom-shares-surge-in-hong-kong-debut ).  If you really want to look at it through a multiple perspective: eBay has a net profit margin of approx 25%.  At scale, Jumia may have the same (similar business model (3rd party sellers mainly who pay a fee)).  This means its trading at 100x "P/E" which is expensive but not when considering that this could grow 30% a year for 20 years (which would increase revenue by 189 times after 20 years). 

 

IMO one reason people want to sell Jumia to you is the GARP heuristic people use: divide P/E by growth rate.  However, a company growing at 33% a year for 20 years is 229x (!!) bigger than a company that starts off growing at 250% the first year with the growth rate halving every year (for 20 years) (and yes the 3% growth a year over 30% makes a huge difference).  People don't understand how much more valuable a long runway is versus an immediately even higher growth rate. 

 

My perferred valuation strategy is an expected value.  I assign 2% probablity that this becomes as dominant as Alibaba (and adjust for smaller African population) and discount back 15 years.  33% chance this becomes as valuable as Mercadolibre (and adjust for larger current market of Africa) and discount back 10 years, and the roughly 2/3 remainder value at the Price/GMV multiple that Ebay current sits at (despite much slower Ebay growth and much higher market penetration).  In billions: .3 (GMV multiple of EBAY @JMIA GMV) *.65 + .33 * 22 (mercadolibre MC)*1.5 (TAM Africa is larger)*.93^10 (discounted back to present day)+.02*540(BABA plus Ant minus BABA ownership of ant value)*2/3 (population adjustment)*.93^15 (discount) = .3+5.2+2.42 = approx 8 billion dollars MC, which is still more than a double from here (and using very conservative numbers considering 2/3 of the time I say this is worth 300 million dollars).  Let me know what you think. 

[Spekulatius]

https://www.theafricareport.com/11855/jumia-investors-may-regret-chasing-an-elusive-dream/

 

Getting a logistics network operating in Afrika won’t come cheap.

[cameronfen]

https://www.theafricareport.com/11855/jumia-investors-may-regret-chasing-an-elusive-dream/

 

Getting a logistics network operating in Afrika won’t come cheap.

 

Certainly but its not really necessary with there low penetration (3% of population in the countries they are present in) that likely already live in developed cities (they already do have over 100 logistic partners).  Right now they can grow it's likely they can continue to grow without a large logistics system.  However, as there is no real logistics company in the rural parts of Africa, I think they rightly recognize that this will create a moat.  Perhaps they are too ambitious building this in house at this time, but while a undeveloped logistics platform will certainly slow growth, its not a pressing issue if it needs cash.  Furthermore while Rocket and MTN may be trying to exit (less concerned about MTN as they have other issues which influences the selling decision), I find it highly unlikely that the largest eCommerce company in Africa will not get funding from the Tencents, Softbanks and Alibaba's of the world.  Put another way, if you were in China and there was no logistics platform to ship products, would it be profitable to create one?  Now imagine you also own high margin third party eCommerce platform and payments platform that would also massively benefit from this infrastructure.  I think its unlikely in expectation ROI would be low or unprofitable and the people that have the money to finance this know this too.  It may be a huge undertaking for an average 3 billion dollar company, but there unique position means you have to invest in them to capture that massive ROI.  Jumia also just did a capital raise with Mastercard on April 2 probably as a way to establish a valuation before IPOing. 

 

Like the rest of the developing world, Africa saw China and South East Asia growing like gang busters and so even many of the dictators reformed the economic system to be conducive for development.  The Africa today is much different than the Africa of 20 years ago.  For example the middle class (defined as a global middle class) is twice as big (350m vs 165m) in Africa as in South America (due to a population that is 3x as big).  These people typically live in cities with functional logistics networks and have access to internet.  (although keep in mind they are still way bellow the US middle class: the global middle class can afford things like mopeds and fridges and can go on vacations by train a couple times a year, but are far away from owning a house in the suburbs with kids going to expensive colleges)

 

They do mention companies like Kongo as a company that crash and burned setting up eCommerce in Africa, what they neglect to mention is that a big reason they crashed and burned was that they were a Nigerian eCommerce company and Jumia is based in Nigeria and Jumia ate their lunch.  Additionally in a piece of slightly dubious journalism, Naspers exit from Nigeria was because it bought then sold Kongo. 

 

That being said, even if the median return is low, as my probability weighted valuation showed, because the upper skew is so high, it is likely that this turns out well in expectation. 

[Jurgis]

I think this might have potential. Please post on the thread when this crashes 50%+ or grows couple years and price is still the same. Not saying this will happen, but would be happy to look into it if it did. I guess I could buy tracking position, but probably will pass for now.

[cameronfen]

I think this might have potential. Please post on the thread when this crashes 50%+ or grows couple years and price is still the same. Not saying this will happen, but would be happy to look into it if it did. I guess I could buy tracking position, but probably will pass for now.

 

With the IPO overhang this could happen.  I'll keep you updated. 

[SHDL]

At a bare minimum they’ll need to improve their operating cash flows to get me interested.  They are going to run out of cash in like 2 years unless they do so. 

[cameronfen]

At a bare minimum they’ll need to improve their operating cash flows to get me interested.  They are going to run out of cash in like 2 years unless they do so.

 

So this is the problem with tech companies their capex is in opex.  Their "capex" is marketing spend and programmer spend which is in g&a. 

[SHDL]

Yes, I know.  Either way, it won’t be good if they run out of cash.

[cameronfen]

^ certainly.  While Spek my disagree, I think it shouldn't be difficult to do a secondary in 2 years.  They also have no debt but unicorns seem allergic to debt.  Alibaba and Tencent have invested billions in competing eCommerce companies in Southeast Asia.  Jumia being the dominant ecommerce player with an even larger TAM is a more attractive option imo than Sea and Lazada.  Sure your will get your ownership diluted, but we know from other established eCommerce players and stats like gross margin/asset ratio that the business should compound capital at high rates which means the buyers of secondaries are subsidizing you as everyone shares in the return on capital (above wacc), but the buyers of the secondary are the party that pays in. 

 

I will say in mind the biggest question is why do more knowledgable players beside MTN want to exit?  (MTN has high debt and secular headwinds)

[SHDL]

I just got this:

 

https://citronresearch.com/not-all-ipos-are-created-equal-jumia-is-a-fraud/

 

Some serious allegations here ... no idea whether the report is right or not, but at least it is entertaining.

[cameronfen]

I just got this:

 

https://citronresearch.com/not-all-ipos-are-created-equal-jumia-is-a-fraud/

 

Some serious allegations here ... no idea whether the report is right or not, but at least it is entertaining.

 

Just saw this too.  I guess since im the defacto defender of the company ill do defacto defending.  I havent seen the confidential report so i know less then citron on that. 

 

Things that trouble me:

1.  30% of returns are cancelations by buyer.  Could be due to lack of logistics or could be inflating GMV.  Note though despite average customers being inflated, GMV is not between the two reports.  I have no really good understanding why 30% of returns are cancelled. 

 

2.  While it seems wierd why you would risk lawsuit for inflating number of buyers when investors are mainly looking at GMV for your size, inflating number of sellers seems like a fraudy thing to do that makes sense. 

 

3.  corruption.  Anybody who has lived in emerging markets knows that corruption is par for the course.  That being said if higher ups are using the company as a piggy bank, maybe I shouldnt invest.  Moves the prior. 

 

Things that dont bother me:

 

1.  Konga sale and amazon leaving Nigeria:  Konga exit was basically because it was recognized that Jumia was too dominant in Nigeria to take on.  I have to imagine the Amazon exit was the same (although I do not know). Left must know this, but is distorting facts to make it seem like its because Nigeria is a unattractive market.  To me this makes him look like he has an agenda (which to be fair he does because thats how citron works). 

 

2.  Inflating the number of buyers on Jumia.  If you were going to commit fraud why inflate the buyers number and keep GMV the same?  Everyone is looking at GMV, no one is using buyers as a metric for market power.  I think they could have used a different definition of buyers and sellers Monthly active vs yearly active or something.  That being said inflating those numbers so you can sell out is still sketch. Have to wait for company defense. 

 

3. Jforce fraud.  I suppose all 40% of sales could be fraud combined with the 30% cancellation rate.  However JForce is basically sales people with a wierd name.  They get paid a percentage of sales (3% I think).  Its not like these people are going to stuffing 100% of sales and collect 3% commision and when Jumia finds out they dont claw back comission.  Salespeople do stuff sales.  Its also 3rd world country, and there is a baseline level of corruption and I'm not surprised if it permates the salesforce.  Now a culture of inflating sales where management turns a blind eye is troubling if true.  But citron makes it seem like all 40% of sales is fraud when nothing suggests this is the case. 

 

3.  "The history of fraud at Jumia is well documented" slide also is a mischaracterization of the article it sources.  The article describes two higher up managers that took advantage of the company to steal money.  One left the country and is a fugitive.  Both were replaced.  Again emerging market people will do corrupt things.  Maybe hiring isnt so great.  Citron seems to imply that the company is working with these theives to defraud investors when both were replaced when it was discovered and one is a fugitive.  This was also an article from 4 to 5 years ago. 

 

4. Hodara: Saw this related party transaction in the proxy before investing.  Leaves a bad taste in the mouth, but could be relatively legit and not as bad as things that go on at a company like Ashford and that was/is a viable long. Reflects poorly on the ethics of the leaders, but from a dollars and cents thing doesnt move the needle.  Also the quote about sweeping things under the rug comes from the same article as point 3 and is not only a mischarterization of the article, but the quote was written at least 2 years before the related party transaction happened.  Like i said these corruption things moves the prior a bit but i had already seen at least this one. 

 

 

My guess is there is something there to the unethical management thing (it is a rocket internet comapany after all).  Its not an outright fraud as you can just go and buy stuff from Jumia if you live in Africa.  Left knows this and he may be on to something but my guess is he is in for the short term bump and covering as we speak.  Again note i have not seen the confidential investor report so i cant really argue with the validity of this.  My priors move a bit.  I will make the position smaller but im going to wait for this to blow over before selling. 

[Pelagic]

I think this might have potential. Please post on the thread when this crashes 50%+ or grows couple years and price is still the same. Not saying this will happen, but would be happy to look into it if it did. I guess I could buy tracking position, but probably will pass for now.

 

Guess you got your wish a bit sooner than expected.

 

Anyone else a little concerned about the ratio of consumers to suppliers? Jumia is roughly 50:1 (2.1M:43k) buyers to sellers which is quite high (2017#s). eBay is 6:1 (2015#s first that came up but I doubt it's changed materially). Usually a marketplace would have started to benefit from some of the flywheel effects at the scale Jumia is now where more sellers = more buyers, which in turn become sellers themselves. The ratio seems high to me and the number of sellers seems quite low at a cursory glance.

 

Maybe their goal is to curate sellers and provide a higher quality experience which explains the difference between eBay or maybe there are other roadblocks to selling I'm missing.

[cameronfen]

I think this might have potential. Please post on the thread when this crashes 50%+ or grows couple years and price is still the same. Not saying this will happen, but would be happy to look into it if it did. I guess I could buy tracking position, but probably will pass for now.

 

Guess you got your wish a bit sooner than expected.

 

Anyone else a little concerned about the ratio of consumers to suppliers? Jumia is roughly 50:1 (2.1M:43k) buyers to sellers which is quite high (2017#s). eBay is 6:1 (2015#s first that came up but I doubt it's changed materially). Usually a marketplace would have started to benefit from some of the flywheel effects at the scale Jumia is now where more sellers = more buyers, which in turn become sellers themselves. The ratio seems high to me and the number of sellers seems quite low at a cursory glance.

 

Maybe their goal is to curate sellers and provide a higher quality experience which explains the difference between eBay or maybe there are other roadblocks to selling I'm missing.

 

lol I was going to say the same thing about Jurgis' quote.  I think Jumia's model is more like amazon and alibaba, where the sellers arent mostly average joe's but actual distributors running businesses.  They say on their ads targeting sellers (which we can trust because its not an F-1 filing ;)) that 40% of sellers make (revenue I have to assume) more than 400,000 nigerian nira a month ($11k+).  Considering the purchasing power descrepency makes this number even larger. 

[Pelagic]

I think this might have potential. Please post on the thread when this crashes 50%+ or grows couple years and price is still the same. Not saying this will happen, but would be happy to look into it if it did. I guess I could buy tracking position, but probably will pass for now.

 

Guess you got your wish a bit sooner than expected.

 

Anyone else a little concerned about the ratio of consumers to suppliers? Jumia is roughly 50:1 (2.1M:43k) buyers to sellers which is quite high (2017#s). eBay is 6:1 (2015#s first that came up but I doubt it's changed materially). Usually a marketplace would have started to benefit from some of the flywheel effects at the scale Jumia is now where more sellers = more buyers, which in turn become sellers themselves. The ratio seems high to me and the number of sellers seems quite low at a cursory glance.

 

Maybe their goal is to curate sellers and provide a higher quality experience which explains the difference between eBay or maybe there are other roadblocks to selling I'm missing.

 

lol I was going to say the same thing about Jurgis' quote.  I think Jumia's model is more like amazon and alibaba, where the sellers arent mostly average joe's but actual distributors running businesses.  They say on their ads targeting sellers (which we can trust because its not an F-1 filing ;)) that 40% of sellers make (revenue I have to assume) more than 400,000 nigerian nira a month ($11k+).  Considering the purchasing power descrepency makes this number even larger.

 

When you click to "sell on Jumia" (https://www.jumia.com.ng/marketplace-vendor/) it says you're reaching 200 million+ customers and the F-1 only has us reaching 1/100th of them  :-\

[Jurgis]

Thanks for the shout out, but I guess I'll continue watching this. Citron's deck is pretty weak, but there might be enough questions to not invest.

[cameronfen]

I think this might have potential. Please post on the thread when this crashes 50%+ or grows couple years and price is still the same. Not saying this will happen, but would be happy to look into it if it did. I guess I could buy tracking position, but probably will pass for now.

 

Guess you got your wish a bit sooner than expected.

 

Anyone else a little concerned about the ratio of consumers to suppliers? Jumia is roughly 50:1 (2.1M:43k) buyers to sellers which is quite high (2017#s). eBay is 6:1 (2015#s first that came up but I doubt it's changed materially). Usually a marketplace would have started to benefit from some of the flywheel effects at the scale Jumia is now where more sellers = more buyers, which in turn become sellers themselves. The ratio seems high to me and the number of sellers seems quite low at a cursory glance.

 

Maybe their goal is to curate sellers and provide a higher quality experience which explains the difference between eBay or maybe there are other roadblocks to selling I'm missing.

 

lol I was going to say the same thing about Jurgis' quote.  I think Jumia's model is more like amazon and alibaba, where the sellers arent mostly average joe's but actual distributors running businesses.  They say on their ads targeting sellers (which we can trust because its not an F-1 filing ;)) that 40% of sellers make (revenue I have to assume) more than 400,000 nigerian nira a month ($11k+).  Considering the purchasing power descrepency makes this number even larger.

 

When you click to "sell on Jumia" (https://www.jumia.com.ng/marketplace-vendor/) it says you're reaching 200 million+ customers and the F-1 only has us reaching 1/100th of them  :-\

 

My guess is what they are saying is 200 million nigerians or africans on jumia nigeria have access to the site.  Most don't buy or even visit it.  I think compared to brick and mortor where its just your town is the point they are trying to make.  I dont interpret it as much of a red flag other than exaggerating to attract people which seems to be a pattern with jmia. 

 

@Jurgis I think its even more reasonable you pass now then before assuming you had no way to access the report Left got his hands on. 

[cameronfen]

Listened to the conference call. Would like to hear from someone that suffers from less confirmation bias then me. Management only waited for Q&A to respond to any questiond on the short thesis.  They addressed JForce sales by saying they only pay comissions on gmv after returns and cancelations with penalties for more returns, but did not mention how much the fraud was even in qualitative terms (maybe for competitive reasons or slipped his mind idk why that happened).  Cancelations were addressed via african logistics issues and cash on delivery payments which I dont know if it is satisfactory.  The sellers and buyers issue was not mentioned but they continued to use the "inflated" numbers with a more detailed definition of what constitutes a seller or buyer (basically anyone how transacted before returns cancelations...).   

 

Even when they were pressed by an analyst to provide a more cordinated defense they basically said these attacks are baseless and they wont feed the shorts, but were happy to answer questions offline. To me management sounded like the didn't understand the dog eat dog world of the stock market today.  I understand that management wants to run a company and not engage in a prolonged pr campaign.

But whether you are a fraud or not, nowadays you put together a point by point defense against a short thesis.  I sent them an email asking for clarification on the points they did not address and also pointing out basically how naive there approach is to the shorts is (whether they are inflating number or they aren't tbh).  I will let you know how they respond and will definitely at least trim my position if I dont hear back satisfacorily. 

[SHDL]

Just out of curiosity, I read the press release and listened to the call.  I was already quite negative about this, but now I am … amazed.

 

First, the quarterly numbers (in euros):

 

- revenue: 32m, up 12% YoY

- operating cash flow: -39m, vs -33m a year ago

 

So their revenue growth is decelerating in a big way and their cash burn is accelerating in the meantime. 

 

Yet the company insists it is doing great with its whopping 58% YoY growth in GMV — never mind the accusations (to which they are not responding btw) that their GMV figures are massively inflated by returns, cancelations, failed deliveries, etc.

 

Market cap: $2bn, or ~13x TTM revenue.

 

I really don’t think you need this to be a fraud for this to end badly…

[cameronfen]

^ They did not answer anything about the short thesis, I agree.  Maybe drinking the cool aid but I think they dont have much experience dealing with shorts and management just wants to run the company.  Even points that were obviously misstated they didnt bother to address which makes me feel they are more naive then hiding something.  But they didnt address many points I still have questions about. 

 

Regarding your company specific points: really you want to look at gross profit growth not revenue growth.  Third party sales revenue is booked as a transaction fee on the sale.  First party revenue is booked as the entire sale price of the item.  So its not an apples to apples comparison.  Furthermore, as the platform matures, obviously they will shift mix towards higher roi third party sales.  The first party sales are just done because they cant find sellers in an important niche.  These are not sales a company should be making when it matures. Gross margin grew by 80+% and GMV grew by 50+%.  Suggesting the actual underlying business is growing quickly.

[SHDL]

Regarding your company specific points: really you want to look at gross profit growth not revenue growth.  Third party sales revenue is booked as a transaction fee on the sale.  First party revenue is booked as the entire sale price of the item.  So its not an apples to apples comparison.  Furthermore, as the platform matures, obviously they will shift mix towards higher roi third party sales.  The first party sales are just done because they cant find sellers in an important niche.  These are not sales a company should be making when it matures. Gross margin grew by 80+% and GMV grew by 50+%.  Suggesting the actual underlying business is growing quickly.

 

Right, that’s what the management says we should focus on.

 

Personally, in situations like this I prefer to focus on numbers that are relatively difficult to fake, like revenue and cash flows.  I’ll take another closer look at this if/when things start to look better on those fronts. 

[Spekulatius]

While not unique to Jumia, I wonder if we are at a point in the cycle where we see a lot of naked bodies, as the water starts to recede. Lyft and Uber come to my mind as well.

[cameronfen]

Regarding your company specific points: really you want to look at gross profit growth not revenue growth.  Third party sales revenue is booked as a transaction fee on the sale.  First party revenue is booked as the entire sale price of the item.  So its not an apples to apples comparison.  Furthermore, as the platform matures, obviously they will shift mix towards higher roi third party sales.  The first party sales are just done because they cant find sellers in an important niche.  These are not sales a company should be making when it matures. Gross margin grew by 80+% and GMV grew by 50+%.  Suggesting the actual underlying business is growing quickly.

 

Right, that’s what the management says we should focus on.

 

Personally, in situations like this I prefer to focus on numbers that are relatively difficult to fake, like revenue and cash flows.  I’ll take another closer look at this if/when things start to look better on those fronts.

 

Wait but management explanation makes a lot of sense.  For third party revenue they earn 5-10% transaction fee of whats sold and most of that is gross margin.  The cost of producing the good is born by the seller and doesnt enter into revenue.  For first party revenue, they earn 100% of whats sold as revenue and 5 to 10% of it is gross margin and the rest is cost paid to the producer of the good, but 100% is booked as revenue!  If you want an accurate repersentation of their moat or growth of the company, it makes sense to look at how much goods is sold and compare company growth on either a gmv basis or a gross margin basis.  Sure it is what management is saying, but it makes perfect sense.

 

 

There is no question they could be faking it, but the Citron report is all about faking revenue not gross margin.  Note that even in the Citron report, the one metric that was the same accross both JMIA presentations was GMV.  I'm sure revenue was the same but it was not mentioned.  I think you are right cash flows may be a good metric, unfortunately it wont work for this company for obvious reasons and is a good reason to not go long.  Granted I'm not trying to get you to buy the stock, at least conciously, but maybe I'm taking this too personally. 

[SHDL]

Wait but management explanation makes a lot of sense.  For third party revenue they earn 5-10% transaction fee of whats sold and most of that is gross margin.  The cost of producing the good is born by the seller and doesnt enter into revenue.  For first party revenue, they earn 100% of whats sold as revenue and 5 to 10% of it is gross margin and the rest is cost paid to the producer of the good, but 100% is booked as revenue!  If you want an accurate repersentation of their moat or growth of the company, it makes sense to look at how much goods is sold and compare company growth on either a gmv basis or a gross margin basis.  Sure it is what management is saying, but it makes perfect sense.

 

You’re right that they have a perfectly good reason to focus on gross profit as opposed to revenue.  However we’ll still need better revenue growth for this to work well as a long term investment, because gross profit cannot grow meaningfully faster than revenue over the long haul.

[cameronfen]

^Sure that makes sense.

[SHDL]

The CEO of Jumia Nigeria (!= CEO of Jumia Technologies AG, the parent company) did an interview today with CNBC Africa:

 

 

I think the whole interview is worth listening to if you’re interested in this company, but the discussion starting at 17:32 was eye opening: they are providing third party marketplace services for FREE!  No wonder they are growing so fast and losing so much money at the same time.