Why Some Investors Should Consider Buying Nu Holdings Stock
Contributor since 2014 / 687 Followers
Summary:
- Nu Holdings’ rapid growth, impressive user metrics, and favorable PEG ratio make its shares attractive despite a high valuation.
- The strengthening Brazilian economy and Nu’s expansion into new markets enhance its long-term growth potential.
- Large institutional investments, including those by Berkshire Hathaway and JPMorgan, bolster confidence in Nu’s outlook.
- Despite risks like persistently high inflation in Brazil, Nu’s promising growth outlook makes it a buy for growth investors seeking positions in developing markets.
Luis Alvarez
Nu Holdings’ (NYSE:NU) phenomenal growth and impressive user metrics, along with the strength of the Brazilian economy, make the shares of the Brazil-based digital bank attractive. While NU stock does have a very high valuation compared to other financial institutions, its PEG ratio is much lower than the sector’s average, suggesting that its valuation is actually favorable, given its tremendous growth. Also making its valuation attractive are its opportunities to greatly expand its user base and its potential ability to make two of its existing markets profitable.
Finally, the fact that many large institutions have been snapping up shares of NU stock this year increases my confidence in the shares’ outlook.
While the stock’s elevated valuation and increasing inflation in Brazil do pose some risk to the firm, I recommend that some growth investors buy the shares.
Tremendous Growth and Impressive User Metrics
In the second quarter, Nu’s top line climbed 65% versus the same period a year earlier, excluding the impact of currency fluctuations, to $2.85 billion. Its profit jumped to $487.27 million from $224.87 million in Q2 of 2023, and its net interest margin increased 150 basis points YOY to 19.8%.
Also noteworthy is that Nu’s operating margin in the 12 months that ended in June was 49.6%, significantly above JPMorgan’s (JPM) 43.59%, PayPal’s (PYPL) 17.86%, and SoFi’s 2.72%. So Nu is not only growing its top and bottom lines tremendously, but it’s doing so while keeping its profit margins quite elevated. Key to its success in this area is the fact that its average cost to acquire each customer was just $7 in Q2 while it spent an average of just 90 cents per month to service its active customers.
In terms of user metrics, its customer base climbed 25% year-over-year to 87.2 million, while its monthly average revenue per active customer rose 30% to $11.20 from $9.30 in Q2 of 2023. And its activity rate increased slightly to 83.4% from 82.2%. Additionally, as of Q1, Nu had made more than half of Brazil’s adult population its customers. Based on these metrics, I believe that Nu is very adept at attracting new customers (in a cost-effective manner as I noted earlier), keeping its current customers active and raising the amount of revenue that it obtains from them.
The Strengthening Brazilian Economy and Expansion
In August, Goldman Sachs raised its estimate for Brazil’s GDP growth this year to 2.5% from 2.3%. And according to Reuters, ” Brazil’s economy has been supported by a strong labor market and booming services sector, which hit an all-time high in June.”
Nu entered Mexico in 2019, but it only started taking basic bank deposits there last year and only recently began offering personal loans there. Also importantly, the company had only attracted 7.8 million customers in the country as of August and less than 1.3 million customers in Colombia, another one of its relatively new markets. Moreover, Nu noted on its Q2 earnings call that its operations in Mexico and Columbia are still in the investment phase and not yet profitable. As the firm adds more customers and reduces its investments in these markets, it will become even more profitable.
Meanwhile, as of August, Nu was only serving 105 million customers out of 660 million in Latin America. Therefore, the company has a great deal of room to grow in the region over the longer term.
Large Investors and Valuation
A great deal has been written about the large stake that Warren Buffett’s Berkshire Hathaway (BRK-A,BRK-B) has taken in NU stock. Indeed, Berkshire owned a large stake of 107.1 million shares in the name as of the end of Q2. But many other heavy hitters own large amounts of the stock. For example, JPMorgan (JPM) bought 9.25 million shares in Q2, bringing its total holdings to 105 million, and Blackrock (BLK) boosted its stake by 22.76 million shares to 92.16 million. Also noteworthy is that Saudi Arabia’s sovereign wealth fund more than tripled in holdings of NU shares to 3.8 million in Q2. Since I have little doubt that these entities employ top financial and stock experts, the fact that they have purchased so many shares of Nu makes me more confident in the company’s outlook.
What’s more, all institutions bought 288.237 million shares of Nu last quarter while only selling 167.278 million.
On the valuation front, Nu’s forward price-to-earnings ratio of 36.5 is far above the financial sector average of 12.65 times, and its forward price-to-book ratio of 8.56 is much higher than the sector median of 1.22 times. But its trailing PEG ratio of 0.02 is far below the sector median of 0.64, suggesting, as I noted in the introduction to this column, that the shares are undervalued in light of the firm’s growth.
Also noteworthy is that Nu’s forward P/E ratio of 36.5 is far below SoFi’s 97.7 Nu’s forward price-to-book ratio is far above SoFi’s 1.9 times, but Nu’s forward price-to-sales ratio of 6 is not tremendously higher than SoFi’s 4.56. And last quarter, SoFi’s revenue climbed 22% YOY, versus Nu’s 65% increase, excluding currency headwinds.
Risks to My Thesis
Brazil’s central bank recently expressed concern about the fact that the country’s inflation rate remains well above its 3% target. What’s more, the bank indicated that it could raise rates in the near future. Such a development could increase Nu’s net interest margins. But higher rates could raise the bank’s credit card and personal loans chargeoff rates while decreasing loan demand in its main market. As a result, significantly higher rates in Brazil could cause its top and bottom lines to decelerate.
Moreover, Brazil has had its share of political instability in recent years. Any outbreak of violence or major political uncertainty could cause Brazil to enter a recession which would prove to be quite negative for NU stock.
Similarly, Donald Trump could win the presidential election and institute curbs on immigration from Mexico which may undermine the Mexican economy, reducing Nu’s chances of becoming profitable there.
Finally, Berkshire could start selling shares of NU stock, putting pressure on the shares price and causing some retail investors to follow suit.
The Bottom Line on NU Stock
Nu’s tremendous growth and promising outlook make its shares attractive despite its high valuation. Consequently, I recommend that growth investors looking for exposure to developing markets buy the shares.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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