Exploring the Rationale Behind Buying Nu Holdings Shares Prior to November 13th
Exploring the Rationale Behind Buying Nu Holdings Shares Prior to November 13th
Nu Holdings (NU) (-1.25%), the biggest digital bank in Latin America, is set to release its third-quarter earnings report on Nov. 13. Despite its 80% year-to-date surge, I believe it's still an excellent growth stock to invest in, and here are seven reasons why:
1. Massive customer growth
Nu's customer base has significantly expanded, growing from 33.3 million at the end of 2021 to 104.5 million by the end of Q2 2024. As a digital-only bank, or a so-called "neobank," Nu has outpaced its brick-and-mortar competitors in terms of expansion.
There's still potential for growth. The World Bank estimates that at least 70% of Latin America's population remains unbanked. However, the region's internet penetration rate increased from 46% in 2013 to 81% in 2023, making it an ideal market for digital-only banking services. Currently, Nu operates in Brazil, Mexico, and Colombia, but its momentum suggests it could expand into other countries within the region.
2. Increasing activity rates
As Nu gained more customers, it introduced new services such as checking, credit cards, loans, insurance, investments, cryptocurrency trading, and business-oriented services. Furthermore, it attracted a record 255 million visits to its Nu Shopping e-commerce app in 2023. The latter led to an increase in Nu's activity rate (active customers divided by total customers), which went from 76% at the end of 2021 to 83% in Q2 2024. Also, Nu's monthly average revenue per active customer (ARPAC) rose from $4.50 to $11.20 during the same period.
3. Expanding ecosystem
Nu continues to launch various services to boost customer loyalty and widen its competitive advantage. Recent launches include new generative artificial intelligence (AI) tools for customer data analysis, financial assistance chatbots, and cybersecurity enhancements. They also introduced their own cellular service, NuCel, which strengthens their reach beyond traditional financial services and draws in more customers.
4. Controlled cost growth
Despite gaining more customers, Nu managed to keep its monthly average cost for serving active customers stable at $0.80 from 2021 to 2023. The metric only rose to $0.90 in the first half of 2024, indicating that economies of scale have helped reduce its operational costs.
5. Soaring profits
Nu's improved financial management has resulted in a positive adjusted profit in 2021 and a profitable quarter on a generally accepted accounting principles (GAAP) basis in 2023. Analysts predict that GAAP net income will grow at a compound annual growth rate (CAGR) of 56% from 2023 to 2026 as production continues to scale up.
6. Valuation looks attractive
At $15, Nu trades at only 25 times forward earnings and 5 times next year's sales. These valuations appear to be compelling compared to its long-term growth prospects. Concerns about Latin America's economy or competition from MercadoLibre, which is leveraging its e-commerce market leadership to expand its fintech platform, could compress Nu's valuations. However, they might eventually expand as Nu demonstrates its ability to surpass expectations.
7. Buffett's investment
Warren Buffett's Berkshire Hathaway invested in Nu's initial public offering (IPO) in 2021, with a $1.6 billion stake. This represents a tiny 0.6% of Berkshire's equity portfolio. Despite selling several of its other top holdings, such as Bank of America and Apple, in the last year to raise capital, Buffett has not divested from Nu shares.
It's clear why Buffett would keep holding Nu: it's rapidly growing, profits are increasing, has a robust competitive advantage, and its valuation seems undervalued. If you have the patience to disregard short-term uncertainty, it might be a solid stock to consider before the next earnings release.
Given the current performance and growth potential of Nu Holdings, investing in their finance sector could be a wise decision. As Warren Buffett's Berkshire Hathaway has already invested in Nu's IPO, the high activity rates, increasing customer base, and attractive valuation make it an appealing prospect for those looking to diversify their investing portfolio and focus on long-term growth opportunities in the Latin American market.