Why Morgan Stanley’s new Jumia analyst downgraded the African e-commerce firm

Jumia’s pivot hasn’t convinced analysts and investors
Jumia’s pivot hasn’t convinced analysts and investors
Image: Reuters/Akintunde Akinleye
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Since releasing its third quarter financial report two weeks ago, African online retailer Jumia has seen its share price slide downwards, the latest being a 10% dip on Nov. 29 coinciding with a leading US investment bank’s downgrade of the stock.

Luke Holbrook, a Morgan Stanley equity research analyst, changed the bank’s recommendation for Jumia’s stock from neutral (assigned by a former analyst) to underweight, according to The Motley Fool. Holbrook’s advisory to shareholders in the e-commerce company was that they should aim to sell their stake at $11 per share, essentially expressing low confidence in the company’s performance and trajectory.

Uncertainty around Jumia’s pivot

Morgan Stanley’s new rating on Jumia can be seen as a reflection of declining investor appetite for the Amazon of Africa in 2021.

Jumia closed yesterday on the New York Stock Exchange at $12.31, a long way off its year-high of $65.51 in the middle of February. The company’s last two quarterly reports have emphasized growth in number of customers and orders fulfilled, and an intention to flesh out its payment processing product (JumiaPay) to compete as a standalone service. But when analysts look at the company, they don’t see enough reason for praise.

One of Holbrook’s reported concerns with Jumia is that the value of the goods the company delivers isn’t growing fast enough (it was 8% for the third quarter). The slow growth of gross merchandise value is somewhat tied to Jumia’s pivot to sell more everyday consumer items like groceries instead of higher-value items like electronics. The average value of a Jumia sale has been falling since the company went public, from $41.50 in 2019’s third quarter to $28 this year.

While groceries are likely to increase total volume of sales, the Morgan Stanley analyst appears concerned by the company’s plan to spend heavily on marketing and technology to create the kind of scale that would justify giving up on high-value items.

By rating Jumia’s stock as underweight, Holbrook invites investors to be skeptical of Jumia’s pivot being successful.

Greater e-commerce penetration could help Jumia

It’s not all bad news though. For one, the analyst reportedly noted that Jumia operates in Africa where e-commerce penetration is between 1 and 2%.

That should be a reason to not dismiss Jumia’s prospects since, as the leading e-commerce player across 11 countries, it could be best positioned to take advantage of any positive wind that drives up online retail in the continent. Internally, Jumia seems to be seeking cost-effective means to improve its services; this week, the company said it would test the use of electric bicycles for deliveries in Kenya, a shift away from carbon-emitting motorcycles.

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