U.S. investors may not have heard of Nu Holdings (NU), which operates under the banner of NuBank in its home market of Brazil. But you should get to know this stock because it has incredible opportunities and might be one of the best growth stocks you can buy today.
Nu stock more than doubled in 2023, and it’s off to a great start in 2024. But can it double again?
The unusual Buffett growth stock
Warren Buffett and growth stocks don’t usually go together. Buffett is known for his value approach to investing, which is based on the assumption that undervalued stocks will rise to meet their true values. In the case of a high-growth stock like Nu, might that mean that even at current levels, Buffett still sees Nu as undervalued?
Nu is reporting impressive growth, capturing market share, and demonstrating rising profitability as it scales. It uses a strategy of hooking in customers through its low-fee products, gaining loyalty through its easy-to-use services all in one place, and cross-selling satisfied customers new products and services. Average revenue per active customer (ARPAC) continues to rise sequentially and year over year, offering insight into how Nu manages to report large revenue increases without increasing its cost to serve customers.
Customers are engaged, with an 83% monthly activity rate — that means 83% of account holders have used the platform over the past 30 days. Nu has expanded beyond bank accounts to offer credit cards, investing tools, insurance products, and more. It’s also expanded into new markets, with Mexico and Colombia growing faster than Brazil and holding tons of potential. The growth opportunity is huge.
Is Nu stock too expensive?
Buffett has been quoted many times as saying that it’s better to buy great companies at fair prices than fair companies at great prices. Nu is a great company, and it might be fairly valued right now, even if it appears expensive at first glance.
Whenever you consider buying a stock, you should evaluate it from multiple angles, including the angle of valuation. So while you might be put off by a seemingly high price-to-earnings ratio, consider the price-to-sales ratio, the forward price-to-earnings ratio, and other multiples. You should also consider the valuation in comparison to similar companies over time.
Nu stock trades at a relatively high price-to-sales ratio of almost 10, but a reasonable P/E ratio of 54, which isn’t objectively cheap but is inexpensive for a high-growth stock. Its forward P/E ratio looks very cheap, though, at only 19. As it generates higher profitability, this becomes a more accurate representation of its valuation. It also means that Nu’s price could go higher without becoming meaningfully more expensive.
Can Nu stock double again in 2024?
Nu is an excellent choice for a profitable growth stock that could add value to your portfolio. It’s already up 36% this year, and as it reports higher net income, its stock could continue to soar.
To double for the full year, it would have to go from a market cap of $40 billion at the start of the year to $80 billion. Keeping the P/E ratio constant would imply net income of $2 billion. There isn’t a long enough history for us to know if that’s possible, but it increased more than that over the past year, going from a loss in 2022.
Nu stock could double this year, and it has a compelling long-term growth story.
— Jennifer Saibil
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Source: The Motley Fool