What's up guys and welcome back to wall street millennial on this channel, we cover everything related to soccer. Investing we'd like to thank composer for sponsoring this video, but more on that later, in this video we're talking about someone we haven't mentioned in quite a long time, that is the infamous short seller andrew left, who runs the firm citron research left made his name by Uncovering fraudulent or otherwise flawed businesses shorting their shares and then putting out a damning short report to expose the company and drive the share price down. You probably remember him as one of the most public gamestop short sellers suffering huge losses during the short squeeze after that. Catastrophic loss, he said that he would stop publishing short reports and instead focus on long positions.

One of his favorite long positions was an african ecommerce company called jumia technologies, which he said has 300 upside africa has a population of 1.2 billion people and e-commerce is still in its early days, so there could be a huge growth opportunity for jumea going forward. He first published his long report on the company in october of 2020, when the stock was about 17 in the following months. It looked like things were pretty good with the stock more than tripling to 62 dollars a share in february 2021 in may of 2021, he doubled down releasing a second report recommending the stock. Since then, it has decreased by 65 percent.

Its current price of nine dollars is well below even the company's ipo price of 15 back in 2019.. Investing is risky and anyone can make the mistake of picking the wrong socks. But what makes left's recommendation of jumia interesting is that, just one year prior, he called the company a fraud and shorted his shares. In early 2019, he said that the company faked a huge portion of their active customers and gross merchandise volume to pump up their price at the ipo.

After his report, the stock immediately fell by 25 percent and by march of 2020, it had fallen to below three dollars. Needless to say, this was a very successful short for left and he likely made hundreds of thousands or even millions of dollars as the price fell in this video. We'll look at why andrew left originally thought that jumeir was a fraud, why he made a 180 degree u-turn on it and what's going on with the company now, jumia is the largest e-commerce company in africa operating in ia, algeria, south africa and other countries. They operate a platform similar to alibaba, where third-party vendors sell products on their platform.

Jumia charges a fee to these vendors and handles the logistics to deliver the packages to end consumers. They sell everything from consumer electronics to gardening equipment and clothing. They also have an online payment platform called jumia pay, which is similar to apple pay or google pay. Consumers can use this to pay for purchases on the company's e-commerce platform.

They ipo'd on the new york stock exchange in april of 2019 at a 1 billion valuation. This made it the first ever african tech unicorn within the first few days of trading the stock price skyrocketed almost quadrupling in value to give them a 3.8 billion dollar valuation. It's not hard to see why investors were so hyped about the salk. Africa has 1.2 billion people, of which over 500 million already have internet access.

Despite this, e-commerce penetration is negligible with most people buying goods from local retail markets using physical cash. Part of this is because big multinational e-commerce companies, like amazon, have largely neglected the continent due to the lack of logistics infrastructure. Jamia's plan was to build new fulfillment infrastructure from scratch. They invested heavily in warehouses and partnered with third-party delivery companies across the 14 african countries.

That they operate in this could allow them to become the dominant e-commerce platform in africa and benefit from the eventual increase in e-commerce penetration. But there was one investor who wasn't buying into the hype. Citron researchers andrew left received a tip that the company could be a fraud before we go any further quick pause from our sponsors over at composer.trade, many of the biggest hedge funds in the world have graduated from picking individual stocks and instead use algorithms to trade systematically. This is a more mathematical approach that takes human judgment out of the investment process, but unless you are an expert coder and have access to enterprise-grade trading technology, algorithmic investing has been out of reach for ordinary investors, but this is all changed with composer composer.

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Otherwise, you can open and edit it to change the parameters or add new functions to your liking. The possibilities are endless use. My unique link in the description to sign up for composer today see important disclosures at composer.com brochure. Past performance does not predict future results, and none of this is investment advice and now, back to the video andrew left, gained access to a confidential presentation which jumia gave to its private investors in 2018..

This presentation showed key performance indicators, including number of active customers on the platform in gross merchandise, value or gmb. Gmv is the total value of goods sold on the platform left compared these numbers to disclosures, given in the company's ipo prospectus that they filed with the sec? He said that the number of active users in the ipo prospectus was 23 higher than the number reported in the confidential presentation. Perhaps even more damningly 41 of orders reported deliveries were either returned cancelled or never delivered. These were not proper deliveries, so should not have been counted as gmb, but they were.

This was enough for left to call the company a fraud and initiate a short position in its chairs. The company initially denied the allegations saying that the number from the confidential presentation represented different metrics and were thus not comparable to those in the ipo prospectus. But a few months later, things got worse, jumeirah disclosed that they fired members of its staff for fraudulent activities. In the jford's affiliate marketing program under the j-force program, people can earn affiliate commissions by convincing other people to shop on jumea.

They said that some j-force agents, improperly booked sales to fraudulently collect the high affiliate commissions. Some of these fraudulent sales were subsequently cancelled because there was no real end customer, but according to jumia, these fake sales only counted for two percent of their 2018 gmv. So there was some kind of shady activity going on at jumia, but the company claimed that it was very small and they corrected the problem once they found out about it. The most surprising part of the story comes later in october, of 2020 andrew left made a complete 180 degree u-turn.

He said that he covered his short position in jumea and switched to a long position. He published a presentation on his website citron research, saying that the stock was a generational buy. How do you go from saying? A company is a fraud to saying it's a generational buy in just one year. It appears that left was already starting to feel disillusioned.

By short selling, while he'd had a lot of success bidding against stocks in the past, his recent performance wasn't so great. For example, he had recently shorted both shopify and square, both of which subsequently skyrocketed, incurring massive losses for his short positions. He said that jumia has such a large market opportunity in africa that the potential for upside is almost unlimited. The long-term potential of the company was enough for him to overlook the shady sales numbers of the past.

So how do you value a company? That's losing money and will likely continue to burn cash for many years. Obviously, you can't use traditional metrics like price to earnings, because this will give you a negative price target left had a very interesting way of establishing a price target. At the time, the fed induced tech bubble was actively inflating virgin galactic had a 5 billion valuation, despite the fact that they had never flown a paying customer into space. The software company snowflake ipoded an obscene valuation of more than 100 times revenue with market sentiment being so insanely positive.

You can justify just about any price for a company with high growth potential in the distant future left initiated a price target of 100 for jumia. This wasn't based on the company's financials. It was just a number he pulled out of the air while it's true that africa has huge potential for e-commerce in the future. It's likely many years away.

Africa is a very poor continent in jumei's main market of ia. The average annual income is only two thousand dollars when you're only making two thousand dollars per year. You won't have a lot of disposable income to spend on e-commerce delivery fees. Also, most of africa lacks the necessary logistics infrastructure to make a profitable e-commerce operation.

Jumia will have to build this from scratch, which will take years and cost billions of dollars to make matters. Even worse. Many african economies are stagnating. Nigeria has seen negative per capita income growth in every one of the past five years.

The operational and economic difficulties can be seen in jumei's financial results. In 2019, their revenue grew 24 percent, which is pretty good, but not exactly hyper growth. In 2020, it declined 10. As consumer spending was dampened by the pandemic in 2021, it increased by 12 percent.

Even more concerning is their massive cash burn. In every year since 2018, they reported operating losses greater than their revenue. There's no clear path to profitability, as even their general administrative costs alone are consistently higher than their gross profit. At the current rate, the company is burning more than 25 percent of its market cap as operating losses per year and not even growing its revenue that fast, even if they could become profitable five years from now, it's highly uncertain if they can raise enough money to Stay afloat until then, with the fed raising interest rates, the market has lost its appetite for cash incinerators like jumia short sellers are typically the most skeptical investors in the market, but even they can get caught up in the hype during a bull market.

Andrew left's 100 price target was pretty absurd in hindsight, as it was not based on any fundamental metrics, he failed to even publish any concrete financial projections which could justify the share price going to 100. When you suspend your disbelief at the height of a bubble, you will invariably pay the price, alright guys that wraps it up for this video. What do you think about jumia? Do you think they can ever become profitable? Let us know in the comments section below, as always. Thank you so much for watching and we'll see in the next one wall, street millennial signing out.