Chit Chat Stocks - Jumia (JMIA) | Deep Dive

Episode Date: May 6, 2021

Jumia owns and operates an e-commerce business across multiple market segments. Jumia operates an online marketplace, a shipment/logistics business, and even maintains its own payment platform. Listen in as Ian, Brett, and Rayn dive into what the company does and where it could grow from here. Enjoy the show! Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow Ian and check out his work on Twitter: https://twitter.com/IanGrayLive Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to our Youtube Channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Email us: [e-mail] Timestamps Company Background | (2:34) Industry | (5:46) Management & Ownership | (8:44) Valuation | (14:43) Earnings | (15:56) Balance Sheet | (18:28) Our Analysis | (21:15) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. This is the Thursday Deep Dive episode with Ian Gray on the line with me and Ryan, as always. Today, we're actually going to be remote. This will be the last one,

so it sounds different. And if you're watching on YouTube, apologies for the few people that do that. We have a weird setup. The mic's blocking my face. It's a whole thing. Kind of funny. if you if you want to watch that but yeah should be back in person after this episode but we're talking to Mia today this was Ian's pick um I'll let Ryan introduce it but Ian is this something you followed a long time or just kind of something that piqued your interest uh followed for probably about six months um have just a tiny little starter position in it just to kind of keep an eye on it but um something I think you know I'm interested in the African opportunity and we'll dive into it today, I'm sure. Yeah. And then Ryan, you want to talk about what the company does,

but first do you want to mention our partners at 7investing? Yeah. So 7investing, as Brett just mentioned, are our partners. They just had new recs come out. And I think you said last time that you like Max's the best. Yeah. But there's interesting ones too. There's stuff for each type of investor. I mean, there was a healthcare one from Dana, their newest advisor. And then Simon had an interesting one, not in the software market like he typically plays, but it was fascinating as well. Matt, Dan is always kind of the stalwarts, steady names that we know and love them for, but yeah, overall great picks. Yeah. I think we're going to have Honor Bond on the show this week too. So we'll kind of get on the podcast, not if you're listening on YouTube or

watching on youtube but uh we'll kind of get insight into the way he thinks um but if you want to go check out the rex use code ccm you get ten dollars off at checkout it's only seven dollars for the first month so pretty good gig but i'm gonna get into jumia so jumia is the leading african e-commerce company um they're essentially three big parts of their business and they have there are like other businesses under these three parts where it's like one of those companies that's trying to do a super app thing where they just put Jumia in front of every possible part of their business. But the primary thing that they have is the marketplace, which is where buyers can get typical goods. So apparel, food, think of it sort of like an Amazon. And it

comes from third-party sellers, or there's a little bit that's Jumia themselves or first-party orders, but it's mostly third party. And then they have a logistic service, which is enabling the delivery of goods from sellers to buyers, exactly what you might think it is. And then they have Jumia Pay, which facilitates transactions on its platform. It also does that sort of through partners. But previously, some of the transactions were being settled at delivery with cash. um and so obviously you can think of what could go wrong there uh and so the goal of jumia pay is to basically replace that and make sure that the transaction is done at the time of the order but they operate in three different regions of africa which consist of 11 different countries

they have operations in west africa so ghana ivory coast nigeria and senegal and then north Africa. So Algeria, Egypt, Morocco, and Tunisia. And then they have some in South and East Africa. So Kenya, South Africa, and Uganda, but most of their business comes from the West Africa segment. And they're actually closing down some of the markets that they, they used to be in 14. I think Rwanda was one Cameroon was one and they there's another one, but they Tanzania would be the other one. So they left those three. But that's the basics of how their platform works. Kind of like it's more like your traditional e-commerce marketplace, but obviously there are sort of logistics hurdles being that it's in Africa.

They don't quite have the same infrastructure or a system like road system, that kind of thing. So just keep that in mind. And then as far as history goes, they were co-founded in 2012 by I'm going to get these names wrong. So I apologize. Sasha Pognonik and Jeremy Hodara. The company started with its operations in Nigeria and Pakistan and received backing from a German internet investment group called Rocket Internet. It was an undisclosed

amount. And then Ian, I think is going to mention this, but they were both, both the founders were originally from McKinsey and they specialize in retail packaging and e-commerce while they were there. And so obviously you can kind of draw the line to them trying to start their own e-commerce firm. And I believe the two people, the two founders are French and the company actually went public in April of 2019. It's been a really strange ride for the stock. But they're headquartered in Germany. They have warehouses all over Africa. And they have more than 4,000 full-time employees now. So that's a little bit about the history, I guess. Yeah, you're right. The stock is volatile. Saying that might be an understatement, but I'll hit the industry and

competition quick. Their industry is tough to say. Don't really have any numbers on them. But Africa is obviously a large continent with over a billion people currently, and they're expected to have over 1 billion internet users in the near future. So that's kind of their total market opportunity, obviously a lot lower than their current penetration right now. And there's not really any exact numbers on retail selling opportunity, but again, they're going after the entire African market. They're really going for it all. So there's no worries here about not enough opportunity for them. It's really about them executing and building out all their products. Retail competitors, there are some local ones that can include Conga, Super Ballast,

Takealot. And then there's a Middle Eastern one that operates in Egypt as well called, I don't know how to pronounce it, but it's S-O-U-Q and it's owned by Amazon. And then there's also the threat of Amazon or Alibaba or someone like that coming to Africa as well. They have food delivery, which they compete with Glovo and Uber Eats is there as well. And then payments, there's Paystack, which is, I think, either got bought out or got an investment from Stripe. And there's Opay and Palm Pay as well. So still, you know, early days, though, I wouldn't really worry or I'd argue it's really all about execution for Jumia. Not at this point. I mean, there can be a lot of winners in all these industries. I don't think focusing on the competition unless they really start doing well is not something, you know, you want to do here.

Yeah. And I would also add sort of like a macro number there. When you think about, obviously Amazon's a bit of an anomaly, but when you think about e-commerce sort of profitability, usually you think about population density and how you want a lot of people closer to one another. So then you're spending more time delivering, less time driving, but they aren't super dense. I saw a number, I mean, we looked at Coupang recently and a lot of those people live in cities most of the population does and they live in really close proximity to one another africa i saw an estimate that said by 2050 they expect like 60 of the population to be to live within

urban areas ignore that honestly i mean they gave out those in the f20 which is like their 10k i mean that's so far away it's just yeah it was i mean it seems like a really irrelevant estimation But the thing to take away there is that they aren't there yet. And that is how far they are from it. So when you look at like the total population of the continent, I would not just, if you're estimating based on TAM, it's going to look like a great company. I think there's nuance to it and pay attention to sort of the hurdles, if you will. Yeah.

All right. Ian, do you want to talk management and ownership? Yep. Yep. As Ryan mentioned, Jeremy Hodara and Sasha Poinaneck are the co-founders and co-CEOs, which is kind of an interesting setup. I know I generally am not a huge fan of the co-CEO thing because it hasn't seemed to work well for many companies, but we'll see what happens here. They were co-founders and I'm sure both coming from McKinsey wanted that title and stuff like that. But as Ryan mentioned, they both worked previously at McKinsey and like consumer

packaged goods and retail and e-commerce and things like that. So for those of you who don't know, McKinsey is a major consulting firm. So they have kind of that, um, don't want to call it wall street experience, but that consulting experience and, um, which some people see as a positive, some people see as a negative, they probably understand business very well, but some people think of, uh, consultants not having a whole lot of operating experience or a lot of know-how about how to actually execute and get things done but um it doesn't it's not a red flag to me it shows that they're um hard workers um and you know who knows who knows what happens but i don't think it's a i don't think it's a big uh influence one way or the other they don't show

any ownership of shares on um like a lot of the major financial data aggregators but each owns options worth about 1.2 percent of the company according to my calculations so they have a healthy stake not a crazy um high stake in this company but a good size stake in it uh it seems to me like the comp may be a little bit high the compensation they they've been making millions of dollars the last couple of years and for a company that's losing uh millions of dollars hundreds of millions of dollars. So a little bit concerning. Again, not a crazy red flag, but it's something to be aware of. They have been taking pay cuts recently, which is good. I think that's showing they're trying to be a little bit more disciplined, but they also before they were public had higher

salaries. And so maybe not the best. It doesn't put them in the best light, I guess. 62% public ownership. So very low institutional ownership compared to a lot of the companies that we look at uh they which which i guess goes to show is one of the reasons for all the volatility in the stock as as uh we've been talking about like this this stock is crazy volatile it's been up it's been down it's been up and down back again so it's it's pretty insane what if you look at the stock chart and part of that like i said is due to higher public ownership um a couple final notes uh Andre Iguodala, the NBA player, is on the board. He's been active in kind of the startup scene and some tech stuff recently.

So they got him on the board. I don't know if that means anything one way or the other, but he's on the board. No, it's a game changer. This company, it's a sure thing now. And then the last thing I'll say is there is a little bit of controversy surrounding this company just about it being french founders potentially exploiting africa and taking advantage of this country um early on they were and i think they still are outsourcing a lot of the um web development jobs and coding jobs and programming jobs to portugal um and one of

the founders said had a comment that is now kind of infamous basically saying that africa didn't have enough developer talent to use african developers which a lot of people were unhappy with um you know i think there is it's tough to say exactly like it's hard to build like africa is just a different place in the western world right now and so it's tough to build a company there and they've tried to do i think a decent job of getting um african heads of um their specific regional regions um regions yeah exactly and so it's it's tough to say but that's something you're going to want to get comfortable with is is kind of exactly how this structure is set up and whether you trust this foreign company really winning in africa or whether it's going to be a truly more

of an african company winning in africa yeah that's that makes sense and there is going to be it's going to be a long journey whatever it is to get out there and then you're right that um the history of French, like, uh, colonies in Africa in this light, it might not look that great. Although, you know, that could just be some, some story. I don't really know much about it, but yeah, that definitely makes sense. I'll, I'll hit valuation. Um, go ahead, Ryan. I would just add that, uh, another point I think you had down there was the related party transaction. I believe there's a group that's sort of affiliated with it. Um, MTN group, um and they own a huge chunk right i think they're like the largest shareholder of uh jumia

um but something of that sort and so there is something to just like look at there and see sort of who's coordinated in it and then also andre agadala he's on the board but he's also on the compensation committee and another committee as well so it's easy to say like that doesn't matter but he is uh involved so if you think he might be a pushover in compensation meetings or something like that or not have the experience to you know since he's a basketball player not a not the history of you know running a business you know like yeah and it isn't to it isn't to like say he can't do it it's just that sometimes there's fancy financial footworking in some of the compensation agreements where maybe he doesn't

to have the experience to recognize that maybe a compensation for CEOs is higher than it should be or something like that. Or maybe it's a generous package. So I just think like, you know, that is actually to me a bit of a red flag or maybe a yellow flag, but I'll let Brett hit valuation. Yeah. Those are good points. Those are good points. All right. Yeah. Valuation. And again, here, I'm going to go with the market cap on Koi Fin of about $3 billion when I record it again, the stock can go up 5% or 6% or down 5% or 6% a day. So really do your own research on the valuation. But I'm looking at the income statement and I think the shares outstanding are a lot higher than what Koi Finner stock row have. And they also raised $340 million in March that will

further dilute shareholders. So I believe the market cap is higher, but I'm going to go for that for now because either way, it's an expensive stock. So we got ticker of JMIA, price to sales of 17.8, price to gross profit of 26.7. So since they're really just a third party platform, they have pretty high gross profit, but their price to contribution profit, which I'm kind of defining here as gross profit minus fulfillment expenses, which I think is a good number to use for evaluating an e-commerce company, that is over 100. So quite expensive. This is still almost a startup in my eyes. And to be honest, I think they could have been too early go into the public markets. They seem really, really early in their business lifecycle.

Well, it looks like they might've needed the public markets. For the money, I guess for the money, that could be an advantage. Yeah. To raise cash. I'll dive into the earnings. They had $140 million in revenue in 2020. That's actually down 13% year over year. But as we mentioned, they moved out of three markets and they also peeled back some of the more unprofitable items. Yeah. First party selling. Yeah. Right. So the gross profit actually increased 22%. So I would pay more attention to that. But the gross margin, as Brett mentioned, is reported at 66%. But fulfillment expenses is

categorized as an operating expense. They might have had to do that, but you should pretty much include that as a cost of goods sold. Because whether it's employees at a warehouse or people driving to and from to deliver packages and stuff like that, that's very much a variable expense. Um, uh, there might be some elements to that that are fixed, but it's, it's going to grow as orders grow. Um, and then, uh, the income statement had a lot of adjustments. So I kind of had to scroll to the bottom to find that comprehensive loss, but for the period, it was $162 million.

So obviously that's more than degenerating in revenue. Um, but it did improve sequentially or year over year. Something else I'd mentioned, they report 6.8 million annual active customers. I think that is the highest of any e-commerce company in Africa. It's 12% more than a year ago, but annual active customers, in my opinion, doesn't really tell me much. So it's as long as a person made one transaction on the platform over the preceding 12 months. So that just feels like it could be manipulated. If you just pour a bunch of marketing expense, like we'll give you $5 to make a transaction or whatever.

It's just easy to sort of boost those numbers, I would say, because you don't have to get them to be super active. I wish they'd give more of like a monthly number or something where it shows sort of recurring nature. Or ARPU or something around how many transactions people are doing, stuff like that. Ian, I think you had something. If not, no.

All right, Ryan, sorry, keep going. Orders did go up, which is good. It was kind of in tandem with that. But 90% of the items sold on the platform were by third-party sellers. That's a little more validating because some of the stuff we've talked about here is a little concerning, but when you have other members selling on the platform, it shows that there are buyers and they're not just wasting their time being on the platform. Yeah. It is like Amazon FBA in that sense. All right. Ian, do you want to hit balance sheet

to wrap up the first half here? Yep. Quick look at the balance sheet. they've got 365 million dollars in cash and equivalents um raised more cash recently though i think they closed on it in march at a market price transaction for getting about 700 million dollars or a total of 700 million dollars on the balance sheet now they're reporting next week so we'll get a chance to see exactly where those numbers came in but somewhere around 700 million dollars in cash is what i'm expecting for reference they burned a little bit over 100 million last year. So they've got a run rate. If they continue with that run rate, even burning a hundred million dollars a year, they've got about seven years of cash, which is a pretty

healthy amount of cash. I think, um, not any debt except for operating leases. So that is one thing to as a, as a good positive for Jumia is that in a, in a company like this, that's losing a lot of money. Um, it's good to see not any debt because that can become a pretty big burden for the company, um, moving forward. So they were able to raise, raise money at pretty high equity prices i think they actually got the money raised at about 38.90 a share and for reference uh jumia today is around um uh let's see here sorry i just had this like 30 ish or something yeah it's like 27 and so you know they were able to raise it at a pretty good price um which is good for shareholders probably and um they're going to be able to get uh you know they've got a fairly

solid balance sheet honestly and they don't have any any sort of um inventory really to speak of just a little bit of inventory as ryan mentioned almost all the sales are third-party sellers so pretty clean balance sheet um just the big thing is heavy dilution yeah and i would also add that uh like they have sort of an interesting history with citron research so citron research published like a short report the stock tank like 40 in the next two days at following it and then And like after like a year or something, Jumia or Citron bought the stock and said it's like a generational buying opportunity, which I thought was interesting. But they're kind of, they're a little performative, I think is the right word.

So take that with a grain of salt. Yeah. The reason I bring it up is because they mentioned there's sort of, there is, they have some ties with Alibaba and they also have ties with SoftBank. And so there is the chance that they get sort of an influx of capital from either one of those institutions, which maybe means they don't have to tap into the equity markets as much. Obviously, that's kind of speculative. Yeah. All right. Well, that's going to wrap up the first half of the show.

I think one note, Ian mentioned they burned $100 million in cash, and that's less than Ryan's net loss number of like $140 million. I think Ian was referring to the operating cash flow number. So if you thought those two numbers were different, you know, that's the clarification. Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices. You'll get real-time alerts. Oh, like this one. So you don't have to worry about malware or when your kid downloads a song from a shady link. And now all your computer can play is red color, red color, where are you?

All blocked thanks to advanced security included with Cox Panoramic Wi-Fi. Advanced security must be enabled in the Panoramic Wi-Fi app. Restrictions apply. Welcome back. Next up, we're going to get quick product experience. i'm assuming none of us have any so we can kind of skip this one right now which i guess that is uh that's probably like my biggest hesitation as someone who isn't an investor is that i have no idea what the product is like uh and i don't know i'm not in africa so i don't know like do

people actually use it or is it kind of just like they're reporting the numbers they want shareholders to see that kind of thing yeah ian i'm assuming no either yeah not really any direct products experience just some of that those things you hear anecdotal things i spent um a couple weeks in africa two years ago and in a country that they don't serve um but i will say this there's an interesting um dynamic in africa where it seems like it's starting to get more onto um um you know you're getting more internet access and more access to like more modern financial tools and so like there's a lot of stations for like remittance payments um where you could like send money to people through like their telephone number basically um and there's just all these

booths like on the side of the road there's like they were everywhere and so there seems to be a need for um some more like i said some kind of more modern financial tools um for things like that, but not a whole lot of direct experience with Jumia. Yeah. The most promising part of the business seems to be Jumia Pay, which I'm looking at. And it looks like your future growth opportunities will probably hit on that later. But before we get to that, Ian, do you want to talk about your competitive advantage? Yep. So I think as we've talked about with a lot of these companies recently, there's not some clear, big moats that protect them from other competitors. But one thing that I will say is they have sort of a first mover advantage. They're part of this

first group of companies to really enter these markets. And if they can take advantage of that and become the standard, that becomes a big boon to them. And also what it's given them is access to public markets where they can raise money. And like I said, they just raised over $300 million at a fairly, at least compared to now, a fairly attractive valuation. And so that gives them an advantage over competitors, just being able to raise that type of money kind of at the drop of a hat um that and access to u.s equity markets too that that some of their competitors don't have yeah access to u.s equity markets and european as well has got to be important for them um ryan do you want to hit yours yeah and they touched on this briefly in

their 20f or whatever which is kind of like the focus thing like so you talk about amazon companies like that even if they moved in there it's not their central market and the other thing is since it's like their main focus and they are sort of as ian mentioned first mover they've kind of earned the scars from it and they hopefully have learned like the difficulties and where stuff doesn't work and they're kind of eliminating it like all right we weren't able to operate in rwanda like we're peeling it back we're moving out of that market like maybe they've learned lessons that other people are going to have to go through now and they can kind of figure that out. Um, they, at least they have survived and the lessons are in the past. Yeah, that'll

make sense. Um, all right. I'll hit mine. I mean, I have none currently, like Ian said, there's nothing that's going to be in the future. It might take 10 years to build any sort of competitive advantage, but if they can build up their logistics network, this comes back to the type, the amount of money they have on their balance sheet. If they can get it to work and it's going to be really tough in some of these economies that are, you know, I mean, even Amazon in a more established place has to send billions of dollars. If they can get those scale economics out there, like a lot of other e-commerce platforms we talk about, like JD.com, Coupang, Amazon. I mean, it's an easy playbook to follow, but you do have to execute on it and

it does take a lot of money. And it could take a decade to build out, but that's something that I think investors need to watch out for. You'd probably want to look out at something like fulfillment expense as a percentage of revenue. That could be something that you watch out for. I don't know, some sort of metric to see if they're getting any efficiencies with the logistics network. Yeah. It just feels like there are sort of a lack of efficiencies. And I mean, it's hard to have any efficiencies if there isn't sort an efficient infrastructure, but that's just, I think the risk, uh, that investors are kind of grappling with. Yeah, for sure. For sure. All right. Ian, do you want to hit your future

growth opportunity? Yep. I'll dive right into that. So my future growth opportunity is Jumia pay, which as I mentioned, I think there's a big opportunity for a company to come in and build the financial infrastructure, especially for consumer, um, whether it's peer to peer payments, whether it's e-commerce payments, all sorts of stuff, as we've seen with things like PayPal and Square in the United States, Mercado Pago in South America. I think there's a big opportunity here in Africa. And JumiaPay grew 30% year over year. It also now makes up 33% of Jumia's transactions on the e-commerce site are paid through JumiaPay. And so they're starting to get a larger share of their, their own transactions. Um, and I think that just provides

a little bit of a, um, a growth opportunity there that if they can really maximize that and get that closer to 60, 70, 80, even 90% of their transactions being paid through JumiaPay, that's a lot of, um, pretty natural growth that's available for them. And so even if it doesn't expand to all sorts of other parts of the market, just really monetizing their own service through JumiaPay, um, they're capitalizing on their own service i think will be a big thing and it just starts to solve some of the problems of doing business in africa um that we've kind of identified here is it's just it's it's still an up-and-coming economy for most like talking about africa as a whole is actually kind of a hard thing all these countries are so different um yeah a lot of them are

different uh there are different stages there are different gdps some of them are um much more similar to Western countries than others. Um, and some of them have, uh, they all have different types of risks and stuff associated with them. But that being said, there's just a, there's a general trend through Africa, um, that it's been difficult to do business historically, and it's starting to get a little bit better. And I think Jumia pay just helps further that along. And so if they can continue to capture a good chunk of that market, um, I think they've got some great tailwinds. Yeah. I'm not sure how hard this will be, but they do mention that they're trying to build out a, not a personal, like a consumer app. It could be personal finance. It

could be more like Venmo. Uh, they mentioned they're doing that, but it isn't launched yet. And I do think there's a potential that that could go, you know, really get them that user growth going for JumiaPay because it is huge just for the efficiencies as well. Getting people off cash and onto these digital payments will really help uh with their long-term margins but ryan uh what do you got for your future growth opportunity uh i'll make mine quick so i i put here moving solely into nigeria uh maybe uh the west africa sort of demographic that they have maybe not just nigeria specifically but i mean geography not definitely yeah and the uh they've got nigeria has 200 million plus people and from what i hear it's one of the more tech savvy uh african

countries. I know John Collison, the founder of Stripe, or maybe it's Patrick Collison. They're very bullish. I mean, you're starting to see a lot of tech entrepreneurs kind of talk about the space. There is risk with Boko Haram. It's like a terrorist organization that has apparently occupied parts of Northern Nigeria, and it sort of presents some economic risk, and they actually mentioned that in their annual report. But I just think it'd be better for them them to go at this kind of like the way we saw Coupang, where they really dominate market share in a specific area and then try to repeat it elsewhere, as opposed to just, I mean, going after 11 countries at once that all have their own differences feels like a much

tougher logistical problem. Yeah, I agree. I'll talk about that with my lowlights as well about the geography thing. But yeah, when you read the risk factors on the 20F and it talks about like legal systems in the countries they operate in. And it talks about terrorist organizations in the country countries they operate in. I mean, you know, like as being a real risk to the business, uh, it's kind of tough to, it's a tough pill to swallow for sure. Yeah. Yeah. All right. I'll hit mine. It's a Jumia logistics. I talked about this already, but they're kind of going the JD.com route and they have to, um, you know, build out their own because there's no UPS or FedEx operating in the country or US Postal Service or whatever we have in a lot of the Western markets.

So they're not only using it for themselves, but they're going to outsource the logistics to third-party merchants and anyone really. At the end of 2020, they only had around 500,000 square feet of fulfillment space, which probably will need to like 10X as they go about their ambitious strategy. I can't remember what Coupang had, but it was like 25 million, I think. But all the cash they raise should help with this. But again, I think they're going to have to raise even more cash because to build out all these things, I mean, we saw with coupon and that's the one on the top of my mind, cause we just covered it with Brad, but what are they spending on CapEx? Like 500 million a year. Jumia is probably going to have to do something similar

if they're really going to execute on this thing and get to the necessary returns on invested capital. I mean, they have to, it seems like they're going to have to invest so much money, but they can't you know like it's something they have to do and if they can succeed it really builds up that moat over time um what are your guys's thoughts on like the logistics stuff how much money they're gonna have to spend stuff like that and you want to go or yeah i think you're right about that that it's going to be a big it's a big capital expense expenditures coming up right just to actually build out the logistics network is a monumental effort because not only do you have to build out, um, factories, but in some cases you're really having to build out the

infrastructure in some of these places, um, to support big facilities like they want to build. So, um, that that's one interest. That's one kind of interesting piece of it. It's also interesting. I don't know that I have a good feel on this, but what the cost of some of this will be compared to some other, um, e-commerce players around the world, like you mentioned Coupang or Mercado Libre, or even something like Amazon in the U S like, I expect that in some ways, the labor costs are probably going to be lower, um, and the cost of land and things like that. But then in other respects, I expect that some of the costs are probably going to be higher just due to, um, not having the, the, the right materials or the infrastructure that like,

it's hard to actually get the materials there to build stuff. And so it's just, it kind of goes to show i think just the difficulty of working in some of these countries is that there's there hasn't been a whole lot of investment into these countries for things other than mining particularly and so trying to build something out like this they really are kind of in the wild you know for lack of a better term the wild west yeah ryan you have anything on that or no i i don't know the area enough to give any sort of logistical take it's just it's it's something that there's a lot of unknowns for me with Africa because I've never studied any business out there. All right. Highlights and lowlights then. Ian, what do you have?

For highlights, it starts for me with just the huge market. Even if it's just in the 12 countries they're currently in and not the entire continent, it's an enormous, potentially enormous market. I also think that the equity offering they did recently is one of the few times when we actually see an equity offering that probably got priced at the right at the right time yeah smart smart move smart move got a really strengthened the balance sheet it was in good shape anyways but now they've got a ton of cash to be able to pursue some of these objectives we've talked about um and i also i really like that they have consolidated in fewer markets as ryan mentioned i i wouldn't be i wouldn't mind them consolidating even further um low lights i'm

not in love with the management team i don't hate them either i kind of i think there's a lot of people out there who hate the management team. And I, I fall somewhere in the middle probably. But there's just so much uncertainty with this. Like it's, that's, that's the hard thing. It's a huge market, so much uncertainty, kind of don't know exactly what to do with it. And in the meantime, it's very, very unprofitable. And so it's, as you've mentioned multiple times, Brad, I think this is a year's long, a year's long investment horizon. Yeah, there's a, that's a tough cocktail to deal with. Ryan, what about you? So there is sort of the opportunity you see in Africa. That's kind of the highlight. I mean, that's what they tout the most on their annual

report. I think that's sort of the investment basis for just about anyone at this point is how big the opportunity is. And then Citron also made the case in their generational buying opportunity report that like sea limited alibaba and mercado libre were a bit early also but it can pay to wait with those although i would just say they're a little those environments were a little more tech savvy um i think uh yeah mercado libre is probably the most similar but yeah especially sea limited or alibaba you know singapore china yeah and then my low lights uh there was the lawsuit settlement uh because they didn't have appropriate disclosures or they um um, withheld certain information that was important. And so shareholders sued them and

they settled. Um, and then there was the material weakness that they reported. That's obvious. Those are like the obvious red flags. And then the company also being headquartered, uh, and pretty much controlled in Europe. So all the developers and stuff, they're all in Portugal or Germany, but then the operations are really in Africa. It feels like that disconnect or, uh, just the separate locations can kind of lead to a lot of miscommunication and maybe also uh there's just less uh i don't think it runs as smoothly when you have to like all right here's what the problems are let's send it back to portugal and have them sort of update it they can't communicate all the time um as hey well to be fair they have zoom we're not sending letters here but i i go i know

but it's just uh it's not like you're saying here's my problem instantly you gotta like make sure you're on the same schedule and stuff like that i don't know it's just uh the dislocation there's something that feels weird about that yeah it seemed it feels like ideally they'd have their headquarters in lagos or something like that that's the the capital of nigeria it doesn't just seem to weird to say like all right our labor is going to be in africa but We're going to run the company from Europe. Yeah, I get an HQ down in Lagos or something, or another country, Nairobi or whatever.

Yeah, I don't know. No, I would agree with that. I would also add low light is there are a lot of people coming in that want to sort of help Africa become more tech savvy. I think Facebook's done it. Yeah, Facebook and Google are laying a lot of fiber, yeah. uh yeah and then you have jack dorsey kind of going over there i don't know what he's doing it might be sort of like a little bit of a wild card but uh it those people are armed with capital

much more capital than what jumia has so it's there will be competition um and very rich competition as well yeah i guess i'm thinking about this now facebook marketplace could be a big competitor yeah just thinking about that now i think that's someone that's a company like you really should track. I'm not sure how much info they're going to give out on the African part of the Facebook marketplace, but yeah. All right. I'll hit my highlights again, just like you guys. Great mission that they're going after just a giant opportunity. They could become a backbone of a lot of these economies in Africa. They could be someone that's really driving GDP growth. And overall, the big highlight would be if they can execute on

Jumia Pay and logistics. I think those are the keys to being successful with this company. They would really help with efficiencies. I mean, Jumia Pay is probably, if they can't execute on Jumia Pay, this thing, it's just hard to see this thing working. Lowlights, though, a lot. Material weakness, sued by shareholders. There's known fraud among some of their sellers and agents. Cash payments, again, lead to giant efficiencies currently and the potential for fraud from

those agents. $28 million in contribution profit last year is nowhere near enough to reinvest into the business for growth. I mean, that's just a tiny number. Huge amount of shared solution, like we mentioned before. Lack of focus, I think, on the core offering. Why are you doing food delivery right now? I mean, that's just easy to add on later. That's something you do five years from now. And then, like Ryan said, lack of focus on the economies. I don't think going after all of Africa is ideal at all. Why they didn't focus on one country at a time is just really, I think, a mistake that could be detrimental to this business and they expanded really fast i think

they at first they were just in nigeria and pakistan and then they were within like six countries in two years you said you said pakistan i don't think that would be correct uh well i got that from wikipedia so we'll say so maybe you're right uh but yeah it just i mean it said nigeria in pakistan but pakistan oh that's that's weird i didn't know they were in the middle east maybe that's wrong it could be right that came from that came from wikipedia so uh maybe that's wrong but the uh it just the expansion happened very very quick like they were yeah almost like they knew they were going to have to sell it to shareholders as like a play on all of africa instead of just a play on nigeria yeah i think that that makes a lot of sense i'm ian you have

anything else on that uh i'll go ahead and dive into more or less interested i think um it ties into what i want to say there so for me it all comes down to this is a huge huge market opportunity even even if it's just going after some of these um just a select few of these countries instead of the whole continent of africa but there is as we've discussed today there's just so much uncertainty surrounding it about can they actually do this and i think they've made missteps as you've been pointing out i think they went into too many geographic markets and i think they went into too many like you said like the food delivery thing like why are you getting into food delivery right now that just doesn't seem to be um something they should

be pursuing but then you sit back and you think about it and you think okay if there's going to be a dominant e-commerce player in africa what's the market cap going to be and it's going to be a heck of a lot higher than three billion dollars um if that were to happen right and maybe that's five or ten years away and that's the problem is that if it's going to take jumia you know five to ten years to really become a dominant player um there's just such an i would be fearful that you know amazon jumps in in a big way or even someone like ricotta libre or sea unlimited jumps in you know they've they've shown some aptitude to be expanding into new markets and particularly see a limited um i just think there's it is a huge opportunity

and three billion dollars for the dominant e-commerce player in africa seems like a steal but there's there's so much uncertainty and so much competition that it it's it really makes it hard to see exactly how they succeed here it's not yeah i would say dominant is less than 200 million in revenue currently so right that's what i mean a potentially dominant uh e-commerce player they're not a dominant player right now. It's a bet on potential if you're going to invest in this stock. Yeah. Ryan, what do you think? I'm less interested just because it's not really my cup of tea, but there is a case to be made where if the best case scenario plays out, or if you kind of throw on some rose colored glasses, this is a much bigger company than

3 billion for sure. I don't think it's a certain bet. I think it's kind of like a call option that just bought itself two more years of liquidity and runway, maybe three more years. I guess they have 700 million now in cash. And they're peeling back spending, which is, I guess, a good sign. I do like that they've started the process of moving out of markets, moving away from unprofitable goods, that first party stuff. It's hard to do as a young company, and they chose to do it. Um, and I think that was the right choice. So I, there's some highlights. I know we kind of seem critical, but I'm, I'm personally less interested. Yeah. And I think one thing to clear about food delivery, I think they've been in it for like

at least five years. Um, so it's not like they just started it, but again, I think that just shows the lack of focus. They're like, all right, we're going to do everything that everyone's doing in the Western markets. All right. Oh shit. We just burned $200 million. Um, but yeah, I'm definitely less interested. And if you are interested in this company, if you like it, I mean, again, we're going to say we're not financial advisors, but man, just maybe nibble and just wait this thing out. You know what I mean? It's not a sure bet at all. There's a risk of permanent loss of capital here. So yeah, I'm definitely less interested, but this is a company I wouldn't mind tracking, kind of maybe taking a peek at what they're doing once a year. And you could

see a scenario where this is a better investment risk reward wise, like 10 years from now, if they execute and start generating cash yeah uh agreed it's just uh kind of there's like a big question mark looming over it uh which is just africa like i don't necessarily know what all's going on and there is all that there's so much macro uncertainty like the legal environment and the terrorist organizations in one of their prominent countries yeah and one of the risk factors said like, cause Nigeria is, I think Nigeria is a big market for them in West Africa specifically makes up the majority of their revenue or payment volume. And they said, uh, if Boko Haram starts to move into South, uh, Southern Nigeria, we could be,

we could see some serious problems. Yeah, no, that'd be tough for sure. All right. That's going to do it. Um, Ian, you have anything else to close things out? i don't think so but we need your stock the week all right right okay uh we're gonna do and this was a recommendation usually when we get recommendations we say we're gonna do them and then sorry well we don't do them but that we're gonna do embracer gaming uh i think someone recommended to that to us so exciting one it's like a swedish decentralized gaming studio will be interesting to check out i think they've been a great performer um so yeah i'm excited for that one. All right, let's close things out. Thank you all for listening. Remember, we are

not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Again, thank you all for listening. We'll see you next week. You