The Latin American digital bank still looks like a promising investment.
Nu Holdings (NU -0.36%), the leading digital bank in Latin America, has been a divisive stock since its public debut three years ago. It went public at $9, dropped below $4 in 2022, but since then it has more than tripled to about $14 per share.
The bulls loved Nu because it was growing like a weed, it had plenty of room to expand, and it was backed by Warren Buffett’s Berkshire Hathaway. The bears warned that Nu faced tough macro challenges in its core markets and a growing list of competitors across Latin America’s evolving fintech sector.
Nu is expected to post its fourth-quarter earnings report on Feb. 20. I believe it’s still a smart idea to buy the stock ahead of that report for seven simple reasons.
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1. Its early mover’s advantage in a fertile market
Nu is based in Brazil, but it also provides banking services in Mexico and Colombia. As a digital-only direct bank, it expanded much faster than its brick-and-mortar competitors. More than 70% of Latin America’s population is unbanked, according to the World Bank, yet the region’s internet penetration rate soared from 46% in 2013 to 81% in 2023. That makes it a fertile market for digital-first banking services.
2. Its customer base is still expanding
Nu’s customer base more than tripled from 33.3 million at the end of 2021 to 109.7 million in the third quarter of 2024. Most of its growth still comes from Brazil, where it serves over 100 million customers and continues to add about 1.1 million new customers each month. Its Mexican market also grew by 1.2 million customers to 8.9 million customers in its latest quarter.
3. A rising activity rate is boosting revenue per customer
Over the past few years, Nu expanded its ecosystem with more credit cards, crypto trading tools, and e-commerce services. As a result, its activity rate (its active customers divided by customers) grew from 76% in 2021 to 84% in its latest quarter.
This rising engagement boosted its monthly average revenue per active customer from $4.50 at the end of 2021 to $11 in the third quarter of 2024. That robust growth indicates its ecosystem is getting stickier as it expands.
4. It isn’t overspending to acquire new customers
High-growth fintech companies often fall into a margin-crushing trap of rolling out too many loss-leading services to lock in new customers. However, Nu’s monthly average cost to serve each active customer held steady at $0.80 from 2021 to 2023, rose slightly to $0.90 in the first half of 2024, and dipped to $0.70 in the third quarter of the year.
5. Its profits are soaring
That blend of robust growth and disciplined spending helped Nu turn profitable on a generally accepted accounting principles (GAAP) basis in 2023. Analysts expect its net income to surge 92% in 2024 as it continues to scale up its business.
6. Plenty of irons in the fire
Nu still has plenty of ways to grow its business over the next few years. It will likely enter more countries, continue beefing up its artificial intelligence (AI)-powered customer data, financial assistance chatbots, and cybersecurity tools; and tether more retailers to its Nu Shopping e-commerce app which reached 255 million visits in 2023.
7. It looks cheap relative to its growth potential
From 2023 to 2026, analysts expect Nu’s revenue and earnings per share to grow at compound annual rates of 34% and 54%, respectively, in USD terms. Those are exceptional growth rates for a stock that trades at 24 times forward earnings.
Its valuations are being compressed by some near-term concerns about inflation and its currency devaluation challenges in Brazil and Mexico. But if you expect those headwinds to eventually pass, Nu looks like a screaming bargain right now.
Leo Sun has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.
