Fintech
Are Nu Holdings shares a buy?
This Latin American fintech is growing at an impressive rate. Is it time to buy?
Nu Holdings (NU 1.21%) dominates the Brazilian banking market and has a tremendous growth opportunity across Latin America to serve unbanked and underbanked populations.
The Brazilian fintech has taken investors on a volatile ride since its 2021 initial public offering (IPO) as it grapples with the growth of the emerging market economy. Over the past year, Nu shares are up 53%. As Nu looks to replicate its success in other regions of Latin America, is now the time to buy?
Solve Brazil’s banking problem
For years, Brazilians have grappled with a failing banking system that saw five banks control 80% of the Brazilian financial system’s assets. Operating as an oligopoly, these banks charged customers outrageous fees, which former Brazilian finance minister Paulo Guedes called a “cartel” demanding “absurd” interest rates on loans.
Just four years ago, credit card rates in Brazil reached 160% annually, while personal loans had interest rates of 100%. The wide gap between loans to customers and Brazil’s benchmark interest rate has made the country’s banking system one of the most profitable in the world, according to S&P Global. However, it also left behind many of its citizens without bankswithout a bank account or savings account.
Regulatory changes have helped improve access to the banking sector and encouraged neo-banks, such as Nubank (the banking subsidiary of Nu Holdings), to enter the market. Nubank targeted customers with free digital accounts and credit cards with no annual fees. In recent years, Brazilians without a bank account have risen from 16.3 million to 4.6 million, or about 3% of the country’s adult population.
Image source: Getty Images.
Nu’s impressive growth
The emergence of Nu in Brazil has attracted the attention of Berkshire Hathawaywhich he added 107 million shares of the bank following its December 2021 IPO. He still holds those shares today.
Things haven’t always gone well for investors. Nu shares plunged as much as 73% in the six months following its IPO, as it surged and racked up significant losses along the way. In 2021, the fintech bank lost $165 million; a year later, it lost another $365 million.
Nu wasn’t wasting his money, though. Instead, he was adding customers at an astonishing rate. Since the start of 2020, the bank’s customer base in Brazil has grown from 23.5 million to nearly 92 million as of March 31. Nubank now serves 54% of Brazil’s adult population.
Chart by author.
Things are looking up for the bank. In each of the last five quarters, Nu has increased its net income quarter over quarter. Last year, its net profit rose to more than $1 billion on $7 billion in total revenue. The positive trend continued in the first quarter of this year, with the neobank reporting record revenue of $379 million.
Nu has done a great job expanding their business cross-selling and upselling to existing customers. In the first quarter, average revenue per active customer increased 29% compared to the same period last year.
Nu is expanding across Latin America
Nu stock isn’t very cheap today, with a P/E ratio of 44.3 and a tangible book value of 9. By these metrics, Nu is quite expensive, compared to other bankswhich leaves the question of whether it’s a good investment today.
However, investing in Nu is an investment in its future growth opportunities. Nubank has set its sights on two huge market opportunities: Mexico and Colombia. In Mexico, Nubank’s customer numbers grew to 6.6 million in the first quarter, up 106% from a year earlier.
Its growth runway could be enormous. Mexico is Latin America’s second-largest consumer market, and recent data from Susquehanna shows that 51% of its population, or 66 million people, are unbanked.
Is Nu Holdings a buy?
Nu has seen excellent growth in Brazil and is seeking an expansion opportunity in Latin America. The bank is currently trading at a high premium, compared to traditional U.S. banks, which could lead to more volatility in the near term.
However, its high valuation reflects the bank’s significant growth potential. For patient investors willing to weather short-term volatility, the long-term upside from here could be huge.
Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Berkshire Hathaway and S&P Global. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.