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How Jumia Technologies Makes Money

When Jumia Technologies (NYSE: JMIA) reported third-quarter earnings in November, management highlighted certain metrics right at the top of its press release. Among the highlights was a statistic on JumiaPay, the company's financial technology (fintech) solution. In Q3, total payment volume (TPV) on JumiaPay was up 50% year over year. That's big.

However, if that metric excites you, there's something you should know: Jumia doesn't make any money from JumiaPay. Its revenue comes entirely from other sources.

Image source: Jumia Technologies.

How Jumia makes money

Jumia operates an e-commerce marketplace in several African countries, including Nigeria, Morocco, and Kenya. It's undeniable that regional e-commerce giants like Amazon in North America, MercadoLibre in South America, and Alibaba in China have generated phenomenal returns for shareholders, and that's why investors are clearly excited about Jumia's opportunity. The African continent has over 1.3 billion people, and it's one of the regions with the lowest adoption of e-commerce to date.

Not all e-commerce marketplaces are created equal. Some, like Amazon, generate a lot of revenue from first-party sales -- items sold directly from the company. Others, like eBay and Etsy, facilitate third-party sales and make money from fees. Jumia's platform facilitates both first-party and third-party sales. However, it's focusing on third-party sales going forward.

Through the first three quarters of 2020, Jumia's first-party revenue has plummeted 47% year over year to 30.7 million euros. As just alluded, this revenue drop is by design. The company is focusing on its path toward profitability, and running an asset-light business is a very good way to do that. First-party sales are simply too costly for Jumia, at least right now, since it's still building its infrastructure.

But e-commerce adoption in Africa is rising. So far in 2020, Jumia's active customers have increased almost 23% from the same period in 2019, and orders are up 8.6%. That's good. Investors should simply note that the company plans to make money from this trend by providing one of the top marketplace platform options for buyers and third-party sellers, not first-party sales.

In Q3, about 70% of Jumia's revenue was generated from commissions and fulfillment fees. Commissions are earned on all third-party orders at a predetermined percentage of the sale. Third-party sellers incur fulfillment fees when choosing to use Jumia's logistics network to get the order to the customer.

Image source: Jumia Technologies.

So why JumiaPay?

If Jumia doesn't make any money from JumiaPay, then why does it bother in the first place? For an e-commerce marketplace to thrive, there needs to be supporting infrastructure. And that's one of the keys to understanding an investment in Jumia.

To paint a word picture, you could harvest apples right away if you purchased a mature apple orchard. But if you plant an apple orchard, the reward is far off. In one scenario, the fruit is ripe for picking now. In the other, the future reward must be cultivated. In the same way, Africa presents a huge long-term opportunity for Jumia. But reaping the reward will take some diligent work.

In the conference call to discuss Q3 results, Jumia CFO Antoine Maillet-Mezeray said: "Logistics in Africa are notoriously challenging with multiple hurdles such as lack of addresses, a lack of organized and reliable capacity, storage space issues, the predominance of cash on delivery, and so on." Specifically, he was explaining the challenges for Jumia's shipping services. But the point is applicable to other areas as well, including the financial sector.

To make e-commerce happen, Jumia needed a viable fintech solution for Africa, so it created JumiaPay. The payment network is powered by Mastercard, but JumiaPay is the mobile wallet. As more people get smartphones for the first time, JumiaPay could bridge the gap to get them transacting digitally. Long-term, the adoption of JumiaPay is good for Jumia's marketplace business even if it's not monetizing JumiaPay directly.

Image source: Getty Images.

Takeaways for investors

Jumia investors need to understand that there's a long road ahead before the company can become an Amazon or MercadoLibre-caliber investment. It's smart to focus on profits by diverting attention away from first-party sales. But to be a rewarding long-term investment, it has to keep creating an atmosphere in which digital commerce can thrive. For that reason, I'd say investors are currently speculating far too much on Jumia stock -- consider it's up around 400% since the start of 2020.

Furthermore, investors should remember that Jumia Technologies is one of the only companies doing the dirty work right now. Once its cultivation efforts start paying off, expect more competition to appear to steal some of the profits. That doesn't mean that Jumia can't be one of the long-term winners. It's just unrealistic to believe the company will enjoy a monopoly in Africa over the decades to come.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jon Quast has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd., Amazon, Etsy, Mastercard, and MercadoLibre. The Motley Fool recommends eBay and recommends the following options: short January 2021 $37 calls on eBay, long January 2022 $1920 calls on Amazon, long January 2021 $18 calls on eBay, and short January 2022 $1940 calls on Amazon. The Motley Fool has a disclosure policy.


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