Despite an old Wall Street proverb that says that "stocks take a staircase up and an elevator down," some companies like Jumia Technologies(NYSE: JMIA) do the opposite.
After a rampant bullish run a year ago, the stock has now entirely erased that move, dipping below the US$15 level on an earnings report.
Third-quarter 2021 results
Although revenues improved, the company reported a soft third-quarter result with increased losses and weaker control over costs.
- Revenue: US$42.7m (up 7.9% from 3Q 2020).
- Net loss: US$66.5m (loss widened 75% from 3Q 2020).
While the widening loss is concerning, it is necessary to point out that at least half of it refers to an increase in advertising expenditures that went from US$7m to US$24m. Thus, it is no surprise to see that orders reached an all-time quarterly high of 8.5m, a 28% growth y/y.
The aggressive advertising tactics are not without critics, as it seems like the company is going back to the strategy that slowed during the pandemic.
Meanwhile, JumiaPay remains one of the most promising divisions, as it is growing beyond the e-commerce market. Nowadays, it is used for anything from paying college tuition to booking bus tickets.
A Look Into Jumia Technologies Cash Runway
You can calculate a company's cash runway by dividing the amount of cash it has by the rate of spending that cash. As of September 2021, Jumia Technologies had cash of US$186m and such minimal debt that we can ignore it for this analysis.
Looking at the last year, the company burnt through US$145m. So it had a cash runway of approximately 15 months from September 2021. While that cash runway isn't too concerning, sensible holders would be peering into the distance and considering what happens if the company runs out of cash.
The image below shows how its cash balance has been changing over the last few years.
How Well Is Jumia Technologies Growing?
Jumia Technologies reduced its cash burn by 3.0% during the last year, which indicates some degree of discipline. Unfortunately, however, operating revenue declined by 2.9% during the period.
Clearly, the crucial factor is whether the company will grow its business from now on. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Easily Can Jumia Technologies Raise Cash?
Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive growth. By looking at a company's cash burn relative to its market capitalization, we understand how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Jumia Technologies' cash burn of US$145m is about 11% of its US$1.4b market capitalization. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted. This has happened in the recent past, with shares outstanding growing by 23.7% in the previous year.
Should We Worry About Jumia Technologies' Cash Burn?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Jumia Technologies' cash burn relative to its market cap was relatively promising.
Although the title that the company carries as "The Amazon of Africa" can sound pretentious, we have to remember that it took Amazon a long time to grow the revenues before focusing on profitability - the so-called "Field of Dreams" business model. If you build it, the investors will come.
As fragmented as it is, the African market still represents one of the remaining big opportunities for e-commerce.
While we're the kind of investors who are always a bit concerned about the risks involved with cash-burning companies, the metrics we have discussed in this article leave us relatively comfortable about Jumia Technologies' situation. Taking an in-depth view of risks, we've identified 3 warning signs for Jumia Technologies that you should be aware of before investing.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.