Nu Holdings (NU) continues to demonstrate extraordinary growth despite a pressured economy, so much so that it has turned a profit for the past two consecutive quarters. It debuted on the stock market just over a year ago as an unprofitable fintech, but it’s catching investors’ eyes as it becomes a dominant presence in Latin America.
It caught Berkshire Hathaway’s attention even before its market debut, and the Warren Buffett-led holding company invested $500 million in Nu in June 2021. So far, Nu stock’s performance has been underwhelming, despite the company’s outstanding performance, and it’s nearly 50% off of its first-day closing price. As it keeps posting high growth and turns a profit as it scales, is it finally time to buy?
How Nu is thriving in Brazil
Nu has rapidly grown from its beginnings as a small fintech disruptor, going from 4% of the Brazilian market in 2018 to 44% as of the end of 2022. It operates under the Nubank banner, offering a suite of digital financial services such as online banking accounts and investment portfolios.
There was some pressure last year when it failed to anticipate changing financial trends, but it successfully raised some of its pricing to adjust to the climate and is benefiting from the results, which have contributed to profitability.
In the 2022 fourth quarter, revenue increased 112% from a year earlier. It added 4.2 million customers in the quarter to reach 74.6 million, or a 38% increase from last year. Nu posted fourth-quarter net income of $58 million, up from $7.8 million in net income in the third quarter, its first as a public company.
Nu has been able to do this by both adding new customers and upselling products. Average revenue per active customer (ARPAC) increased 37% year over year to $8.2, and that has been rising consecutively through many quarters. However, cost per active customer has remained constant.
This has resulted in increased gross profits and gross margin, and that has trickled down to positive net income.
Part of Nu’s appeal is its commitment to low prices, which it combines with a focus on customer satisfaction. The digital framework makes it possible to operate this way while maintaining low costs, and with its economy of scale it has been able to become profitable.
Nu’s model is showing resilience
Another way to assess how Nu is doing as a bank is to look at how it’s managing loans and deposits. Banks are often pressured by a high-interest-rate environment because borrowers tend to default on loan repayments when rates rise. However, the flip side is that banks receive higher interest on loans and other earning assets.
Meanwhile, deposits increased 55% over last year in the fourth quarter, and the total loan portfolio grew 62%. Deposits continued to grow even as Nu’s new pricing went into effect, leading to a decrease in funding cost as a percentage of the deposits. That has led to an increase in net-interest margin, or the amount of money Nu gets from interest after paying interest to its customers.
The potential is enormous
Nu should be able to keep growing by adding customers, engaging them more, and upselling them. And Latin Americans clearly see the value Nu offers, as it’s expanded from a having a tiny portion of Brazilians as members just five years ago to hosting nearly half of the adult population on its platform as of the end of 2022.
It’s working on achieving similar growth in new markets, taking the same playbook and applying it to neighboring countries. It’s gaining in its Mexican and Colombian markets. The Mexican customer count increased 129% year over year in the 2022 fourth quarter to reach 3.2 million, or about 2.5% of the population. In Colombia, it accounts for around 1% of the population. Chief Executive Officer David Velez said the branches in these markets are “beating Brazil at practically every single customer growth and engagement metric.”
This playbook can be copied over to other countries as well. So far management hasn’t discussed entering new markets, and it doesn’t need to at this stage. But that potential remains as a future opportunity.
Adding it all up for investors
Nu stock has been expensive since it hit the market. However, valuation has drastically declined along with its price. Shares trade at a price-to-sales ratio of more than 8, which still seems rich. However, it looks reasonable within the context of Nu’s performance and opportunities. All but the most risk-averse investors should be comfortable with this valuation. Investors should see this as an excellent opportunity to buy Nu stock, which looks like it has a huge growth runway.
— Jennifer Saibil
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Source: The Motley Fool