Don’t read too much into Berkshire Hathaway’s recent portfolio adjustments.
A wide range of diverse investors has been drawn to the exotic and high-growth potential of fintech speedster Nu Holdings (NU -1.81%) in its nearly three years of public trading. Aggressive growth investor Cathie Wood at Ark Invest has been a vocal stakeholder in the parent company of Nubank since its IPO in late 2021. Warren Buffett’s Berkshire Hathaway (BRK.A) (BRK.B 0.36%) has also owned a piece of Nu since 2021.
Shares of Nu tumbled 7% on Friday, after Berkshire Hathaway announced that it had reduced its stake in the digital branchless bank that in less than a decade has become a financial part of the lives of 56% of Brazil’s adult population. There were several filings detailing Buffett’s moves to grow, trim, initiate, or entirely liquidate positions among the nearly four dozen stocks in Berkshire Hathaway’s public portfolio. As Nu is one of the more obscure and volatile names in the mix, it’s not a surprise to see that it was one of the biggest movers.
It’s obviously not a good thing when a generational investor like Buffett decreases his position in a stock. You don’t sugarcoat a retreat. However, the situation isn’t as bad as you might think. Let’s take a closer look.
Looking at things with Nu eyes
Berkshire Hathaway’s move is notable. It’s the first time Buffett’s company has pared back his position on Nu. Berkshire Hathaway has owned 107.1 million shares of Nu dating back to its IPO. It now owns 86.4 million, a nearly 20% reduction in its stake.
Zoom out. Even after Friday’s drop, Nu has soared 69% this year. Go back further, and you’ll see the stock has soared 245% since the start of last year. Buffett owns 20.7 million fewer shares now, but the value of his Nu stake is 56% higher than it was at start of this year and a beefy 197% greater than it was a year earlier.
Berkshire Hathaway also pruned away at more stocks than Nu. You need money to redirect into fresh opportunities. It’s also fair to say that this rapidly expanding provider of financial services isn’t cheap by most conventional measuring sticks. Buffett is a value investing icon. So it’s not surprising that he takes some chips off the table for one of the world’s best-performing fintech stocks.
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A wild week ends in opportunity
It was a roller coaster ride for investors last week. Shares of Nu hit an all-time high on Tuesday, only to slide on Thursday after the company posted third-quarter results. Throw in Friday’s slide after Berkshire’s stock sale and a week that started so promising closed with a 13% slide from its Tuesday peak.
The quarter was solid. Revenue topped $2.9 billion for the three months ending in September, a 58% increase on a foreign-exchange neutral basis or a 38% gain in U.S. dollars. Adjusted income soared 67% to $592 million in U.S. dollars. There was a beat on both ends.
But this wasn’t a perfect report. Average revenue per active customer contracted from where it was in the second quarter. Its net interest margin also took a small step back on a sequential and year-over-year basis.
There are some Brazil-specific concerns, too. Inflationary pressures are picking up. Unlike in the U.S., where interest rates are heading lower, the Central Bank of Brazil recently raised its rates.
There is still a lot to like in the report. Many investors are talking about the 20.7 million fewer shares that Berkshire Hathaway owns now, but how about a company that has 20.7 million more customers? There are now 109.7 million Nubank accounts across Brazil, Mexico, and Colombia, with net growth of more than 5 million during the third quarter. Active accounts are growing even faster, as the sticky platform’s engagement keeps getting better.
Value investors may be turned off by a financial services stock fetching 32 times this year’s earnings and 23 times next year’s analyst target. But growth investors can work the math to see that Nu may be a bargain, since it’s growing a lot faster than those multiples. Just the fact that Nu is profitable — with chunky margins — is significant. It’s expanding its offerings. Nu rolled out in two countries outside Brazil just a couple of years ago. Growth costs money, but Nu’s bottom line continues to grow faster than its top line.
Having Buffett as a stakeholder probably introduced some unlikely investors to Nu Holdings. With the stock’s big run over the past couple of years, they’re probably grateful. However, this stock didn’t take off because it caught Buffett’s eye. He has recently increased his position in Sirius XM Radio, but the satellite radio monopoly has seen its stock cut in half. If Berkshire sold nearly a fifth of its stake in Nu because it’s a winner, as a Nu investor I don’t feel like a loser.
Rick Munarriz has positions in Nu Holdings and Sirius XM. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.
