‘Amazon of Africa’ Jumia targeted by short sellers; should shareholders be anxious?

When African ecommerce firm Jumia [JMIA] debuted on the New York Stock Exchange in mid-April, it was love at first sight for investors. From an IPO price of $14.50 shares soared 75% during the first day alone. On 1 May, the stock closed at a record high of $46.99 – a 224% gain within barely three weeks from its IPO price. Analysts said the firm was well-positioned to tap into the continent’s underserved yet growing middle classes, with the “JumiaPay” e-wallet granting it an edge not unlike Alibaba’s [BABA] in China.

Cue a scathing report by Citron Research. On 10 May, the short-selling blog led by Andrew Left, accused Jumia of omitting less-than-flattering metrics from its IPO prospectus, and cited past news reports of management misconduct as evidence of financial fraud. Jumia’s stock – whose rally had already partially cooled – fell 16% from $32.10 to $26.89 on the day Citron’s report was published.

Within 24 hours, Citigroup [C] – one of the underwriters for Jumia’s IPO – was coming to the rescue, as analyst Andrew Howell published a research note debunking or strongly tempering Citron’s main indictments. But it still took several trading sessions before the share price free fall would reverse: Jumia oscillated from $19 to $27 and $19 again, before finally regaining the $23 ground on 21 May.

The swings have since tempered, and the share price was holding around $25 as of late last week. It closed on 9 July at $27.15. As analysts weigh evidence from both Citron’s reports and the company’s first financial release, what’s next?

Customer metrics: fair or misleading?

Of Citron’s multiple accusations, Citi’s Howell focused on two: “whether active user numbers were in fact restated,” and whether co-CEO Sacha Poignonnec had failed to disclose related-party transactions.

On the first point, Citron based its claim on an alleged discrepancy between the number of active users given in a pre-IPO investor presentation, and the one provided in the prospectus. Howell noted it was difficult to verify whether the change in numbers amounted to fraud as the pre-IPO presentation was not publicly available. But he added “it is not difficult to imagine reasons why active customer data might have been revised from an earlier document, including changes in the way the data was gathered or calculated, different data definitions, or geographical groupings.”

As for Poignonnec’s transactions, Howell said there were plenty of related-party disclosures in the IPO prospectus. Addressing another of Citron’s allegations relating to fraudulent activity in Jumia’s employee and supplier ranks, he wrote: “We find it potentially misleading to make the leap from cases of fraud affecting Jumia’s contractors or employees, to Jumia itself being a fraudulent organisation.”

“We find it potentially misleading to make the leap from cases of fraud affecting Jumia’s contractors or employees, to Jumia itself being a fraudulent organisation” - Citigroup analyst Andrew Howell

Actual value in Jumia’s shares?

On 13 May, shortly after Citron came out with its accusations, Jumia released its first quarterly earnings as a public company. It showed a 30% year-on-year increase in EBITDA losses for Q1 to €39m, despite a doubling in revenues. A month later, the company said it was shedding its real estate marketplace operations in Morocco, Tunisia and Algeria as it focuses on the verticals – from food delivery and groceries to payments – pioneered by US and Asian ecommerce counterparts. And it’s not the only company that has its eyes on African ecommerce: logistics giants Deutsche Post DHL [DPW] is expanding its Africa eShop platform to a total of 20 countries on the continent.

Jumia share price vitals, Yahoo Finance, 10 July 2019

Neither the short seller nor the bulls camp is giving up on Jumia’s stock. At least three class action suits have been launched against the company, building on Citron’s report. On the other hand, the stock – which in June reached a high of $28.28 – enjoys a $34 average price target from analysts, per Refinitiv.

“Jumia has already done the heavy lifting in building out a logistics network and a digital payments platform,” wrote Scott Devitt of Stifel after the IPO. “However, [its] relatively high valuation and long path to profitability drives our hold rating as we await a more attractive entry point… Growth is likely to be bumpy as the ecommerce landscape needs to catch up to the platform.”