This fast-growing Latin American fintech is turning more than heads these days.
There’s a good chance that you don’t own one of the top-performing fintech stocks over the past couple of years. Nu Holdings (NU 2.34%) shares have nearly tripled since the beginning of last year. It boasts a long list of prolific shareholders — including the legendary value-oriented Warren Buffett and the aggressive growth fund manager Cathie Wood — but it’s still not on most investing radars.
There’s an even better chance that you don’t have an account with Nu’s flagship operation, Nubank. It has grown to service 109.7 million customers after launching just a decade ago, but its users are currently in Brazil, Mexico, and Colombia.
Don’t let the lack of experience with the stock or brand shut you out of one of the market’s more dynamic fintech players. If you can stomach the risk, let’s dive into some of the reasons Nu should be near the top of your shopping list this holiday season.
1. Momentum matters
It’s impressive that 56% of Brazil’s adult population has a Nubank credit card. It’s even more of an accomplishment that Nu got there when its branchless bank didn’t even launch in its home country of Brazil until 2014.
This isn’t just an arms race success story. Nu now serves 109.7 million monthly active users across three Latin American countries, a hearty 23% growth spurt over the past year. The real story here is what it’s doing with that audience. It doesn’t cost Nu much to land a new account, and it’s cheaper than you might think to service its growing base. Thanks to its digital underpinnings and its scalable model, the average cost to service an account has fallen to $0.80 a month.
The story gets better. Engagement keeps rising as Nu rolls out new offerings and its users lean more on the platform. Nubank’s monthly activity rate — the number of customers with transaction activity in the past 30 days as a percentage of total open accounts — keeps hitting all-time highs with every passing quarter. Its audience may have grown by 23% over the past year, but revenue in U.S. dollars has risen 38% in that time (and it’s up a beefy 58% on a foreign-exchange basis).
It all comes together nicely. Average revenue per active user is a metric that has taken small sequential dips in back-to-back quarters, but at $11 a month, it’s still 25% higher than it was a year earlier. Circle back to that average monthly cost of $0.80 to service each account, and it’s not a surprise to see that Nu is very profitable despite investing in its product lines and geographical expansion.
Image source: Getty Images.
2. The stock’s correction opens a window of opportunity
Nu hit an all-time high on Nov. 12. Nearly a month later, the shares are trading 27% lower as of Tuesday’s close. There are some fair reasons for the stock’s recent retreat. Despite its posting better-than-expected top- and bottom-line results last month, there were two pressure points in Nu’s third quarter.
I already mentioned the sequential decline in average revenue per active customer. The metric has slipped from an all-time high of $11.40 a month in the first quarter to $11.20 in the second and $11 in its latest update. Nu’s net interest margin also retreated after years of perpetual widening. This will bear watching in the coming quarters.
The stock continued to slide after the quarterly report when Buffett’s Berkshire Hathaway revealed that it had sold 20% of its stake in Nu. This isn’t a red flag. Buffett has lightened his load of prolific companies in the past after periods of sharp appreciation. If Berkshire Hathaway owns 20% fewer shares of a position that has nearly tripled in the past two years, he owns a lot more Nu than he did at the start of last year.
3. Nu is cheaper than you probably think
Let’s wrap this up by parking on the bottom line. The only thing growing faster than Nu’s top line has been the other end of its income statement. Adjusted earnings shot 67% higher in its latest quarter. Despite the sequential dips in average revenue per active customer and net interest margin, profitability continues to grow more explosive.
Though some have voiced concerns, analysts are still jacking their profit targets higher. Nu’s stock has fallen 14% over the past 90 days, but earnings estimates keep rising. Nu is now expected to earn $0.44 a share this year and $0.63 a share come 2025. That means Nu is trading for less than 19 times next year’s adjusted net income target. This may be a stiff multiple for a stodgy bank, but it’s a bargain for a fintech that is growing a lot faster than that. If you’re looking for something new for your portfolio, it may just be something Nu that you’re looking for.
Rick Munarriz has positions in Nu Holdings. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.
