Author Topic: JMIA - Jumia  (Read 4118 times)

cameronfen

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JMIA - Jumia
« on: April 15, 2019, 01:36:15 PM »
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

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Re: JMIA - Jumia
« Reply #1 on: April 15, 2019, 03:16:24 PM »
https://www.theafricareport.com/11855/jumia-investors-may-regret-chasing-an-elusive-dream/

Getting a logistics network operating in Afrika won’t come cheap.
« Last Edit: April 15, 2019, 03:24:24 PM by Spekulatius »
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cameronfen

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Re: JMIA - Jumia
« Reply #2 on: April 15, 2019, 07:34:05 PM »
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

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Re: JMIA - Jumia
« Reply #3 on: April 16, 2019, 01:35:49 AM »
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.
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cameronfen

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Re: JMIA - Jumia
« Reply #4 on: April 16, 2019, 06:39:08 AM »
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

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Re: JMIA - Jumia
« Reply #5 on: April 16, 2019, 07:12:07 AM »
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

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Re: JMIA - Jumia
« Reply #6 on: April 16, 2019, 08:36:25 AM »
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

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Re: JMIA - Jumia
« Reply #7 on: April 16, 2019, 09:07:09 AM »
Yes, I know.  Either way, it won’t be good if they run out of cash.

cameronfen

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Re: JMIA - Jumia
« Reply #8 on: April 16, 2019, 09:22:36 AM »
^ 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

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Re: JMIA - Jumia
« Reply #9 on: May 09, 2019, 10:05:34 AM »
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.
« Last Edit: May 09, 2019, 10:55:33 AM by SHDL »