Nu Holdings: A Promising Investment Opportunity For Aggressive Growth Investors

Nu Holdings (NYSE:NU) is the holding firm for Nubank, a quickly rising Latin American digital financial institution with branches in Brazil, Mexico, and Colombia. When I final wrote concerning the firm, it was solely just a little over two months after its December 2021 preliminary public providing (IPO) and shortly after the corporate launched its fourth quarter 2021 earnings report in February 2022. Though the Brazilian economic system was in a recession within the latter half of 2021, the corporate displayed blazing-hot income progress of 224.3%. Nonetheless, the corporate was unprofitable, with a internet lack of $66.2 million for the fourth quarter and a internet lack of $165.3 million for the yr. Though issues regarded bleak for the corporate’s near-term prospects, and the inventory was under its $9 IPO worth at $7.94, I nonetheless really helpful a purchase for aggressive progress buyers resulting from its wonderful long-term progress prospects in an unlimited whole addressable market – TAM. In accordance with Oliver Wyman’s report talked about within the company’s F-1, the financial institution’s TAM ought to attain $269 billion by 2025. Sadly, any investor who took my recommendation to purchase the inventory misplaced some cash on paper as a result of excessive inflation and rising rates of interest worldwide, making a terrible environment for fintech and neobanks in 2022.

Nonetheless, with inflation dropping quickly in Brazil and the nation’s central financial institution cutting interest rates by a half level in August, the stress is easing on the Brazilian economic system, which is a good tailwind for Nubank’s lending enterprise. In the course of the second quarter earnings name, Chief Executing Officer Guilherme Lago mentioned, “As our lending portfolio continues to indicate robust resilience and a better-than-expected efficiency, now we have as soon as once more elevated our threat urge for food and origination ranges.” The corporate raised its mortgage origination by 53% over the earlier yr’s comparable quarter within the second quarter report, which may assist enhance income progress in future quarters.

Nu Financial institution’s internet curiosity margin (NIM) rose 860 foundation factors to 18.3% within the second quarter — fingers down greater than the NIM of an average U.S. bank. Web curiosity earnings (NII) rose to $1.05 billion. You may consider a financial institution’s NIM and NII as its gross margin and gross revenue, respectively. These numbers are essential for buyers as NII makes up the lion’s share of the corporate’s reported $1.87 billion in income.

Traders just like the numbers the corporate is placing up. When Nu Holdings reported its second-quarter earnings, it simply beat analysts’ income forecasts by $93.34 million and earnings-per-share expectations by $0.02, regardless of unsure circumstances in Brazil, Colombia, and Mexico.

You may see on the chart under that with related 2023 enterprise tailwinds, Nu Holdings’ inventory has simply outperformed its Brazilian friends PagSeguro Digital (PAGS) and StoneCo (STNE) year-to-date. It has even overwhelmed its U.S. fintech and neobank friends, with the one firm maintaining with its efficiency being SoFi Applied sciences (SOFI).

If you’re searching for a superior progress inventory for long-term beneficial properties, it’s time to do some due diligence on this Latin American neobank.

Why the corporate is outperforming

David Vélez, co-founded Nubank to supply a low-cost, customer-friendly, and handy banking service in Brazil, one thing the small variety of giant incumbent banks did not ship. This neobank has taken the Brazilian banking business by storm. You may measure how a lot better customer support the financial institution has by taking a look at its variety of complaints in comparison with its bigger opponents. The next chart exhibits what number of complaints Nu acquired in comparison with incumbent banks in 2020.

The corporate’s superior customer support has translated to strong membership and engagement beneficial properties. Nu Holdings grew its membership base by 28% year-over-year to 83.7 million, and the exercise fee, an engagement quantity, rose to 82.2%. The engagement quantity is extraordinarily essential and might translate right into a loyal buyer base.

By always creating new merchandise and efficiently cross-selling and upselling them to its quickly rising and dependable membership base, Nu Holdings has grown income extra shortly than its friends. Among the many explanation why the inventory outperforms its Brazilian friends turns into self-evident when evaluating second-quarter income progress metrics. Nu grew income by 60% over the earlier yr’s comparable quarter, a lot sooner than PagSeguro Digital, whose revenue shrank 2% in the identical quarter, and StoneCo, which solely grew revenue by 28%. The corporate additionally grew second-quarter income sooner than U.S.-based fintech friends like SoFi Applied sciences (SOFI), which grew income 37% year-over-year. This firm is likely one of the fastest-growing digital banks publicly traded on U.S. markets that yow will discover.

Even higher for its buyers is that Nu has quickly improved its profitability as income grows. The corporate reported gross margin of 41.8% within the second quarter of 2023, 1040 foundation factors increased than its reported gross margin of 31.4% within the second quarter of 2022. This margin enchancment helped gross revenue develop 113% over the earlier yr’s comparable quarter to $782 million.

One other interesting attribute of the corporate for buyers is that it has designed its enterprise to develop its bottom-line earnings sooner than income progress by conserving its prices to function its digital banking platform low. You may simply measure Nu Holdings’ effectiveness at conserving prices down by monitoring its effectivity ratio. The chart under exhibits that the financial institution has shortly lowered its effectivity ratio during the last two years, from 91.6% within the first quarter of 2021 to 35.4% within the second quarter of 2023.

This decreasing of the effectivity ratio has allowed the corporate to proceed membership and income progress whereas rising bottom-line profitability. The corporate lastly turned worthwhile within the third quarter of 2022, as seen within the picture under.

The corporate has elevated its FCF to $1.8 billion within the second quarter, increased than most of its fintech friends. Whereas PayPal might have increased FCF, it has flatlined during the last a number of years and declined in its newest quarter in comparison with Nu Holdings, which is trending up.

Nu Holdings generated $4.194 billion trailing 12-month income as of the top of the second quarter of 2023. Utilizing its estimated TAM of $269 billion, the financial institution has solely penetrated 1.55% of its TAM. The above attributes make this inventory extraordinarily engaging to aggressive progress buyers.

Nu Holdings operates on the protected aspect

Resulting from a unstable financial surroundings, administration has operated the bank conservatively over the previous few years. The chart under exhibits that Nu Holdings operates properly above its capital necessities and maintains a loan-to-deposit ratio (LDR) of 35%, which is low. In accordance with S&P World Market Intelligence knowledge, the average LDR for U.S. banks was 63.6% within the fourth quarter of 2022. Though working at exceptionally low LDRs is a part of the corporate’s technique, it has loads of room to lift the quantity if it needs to speed up income progress.

Brazilian households have been underneath heavy monetary stress resulting from drought, recession, inflation, and high-interest charges since 2020. The chart under exhibits 15-90 non-performing loans (NPL), which administration considers a number one indicator of monetary stress, rising 310 foundation factors from 1.2% within the third quarter of 2020 to 4.3% within the second quarter of 2023.

The excellent news is that because the Brazilian economic system improves and NPLs go decrease, the financial institution has loads of dry powder to extend interest-bearing loans — serving to improve its income progress and earnings.

The corporate has a excessive valuation

Nu Holding’s strengths haven’t gone unnoticed by buyers. In spite of everything, Warren Buffett was an early investor on this inventory. Moreover, it got here to the U.S. public market with tons of hype. Therefore, it was no shock that the underwriting banks priced Nu’s IPO at an especially excessive valuation.

At this time, the inventory trades at a price-to-sales ratio of 8.289, considerably increased than its fintech friends, so it’s little marvel the inventory nonetheless trades under its IPO worth of $9. Contemplating the financial institution operates in a area with an extended political and financial instability historical past, the chance is excessive that the market has overvalued the inventory at present costs.

Alternatively, you may see the inventory’s valuation as an indication that Nu Holdings is a a lot better fintech alternative than its friends. The corporate has superior income progress and quickly rising profitability and FCF. Subsequently, bullish buyers would suppose the valuation is justified.

How does Wall Road have a look at it?

The consensus scores from Wall Road and Searching for Alpha analysts of Nu Holdings are a purchase. Wall Road Analysts common worth goal is $8.52, 17.52% above its September 29 closing worth.

Searching for Alpha reported on September 11, 2023, that J.P. Morgan analyst Yuri Fernandes upgraded the inventory to Chubby from Impartial. Fernandes wrote a word that suggests the corporate will proceed gaining market share in Brazil.

Must you purchase the inventory?

Nu Holdings has appreciable income and earnings progress prospects in Brazil, and will it repeat that success in Colombia, Mexico, and different Latin American international locations, the inventory ought to handily beat the market’s returns. This firm is a purchase for aggressive progress buyers searching for high-upside alternatives over the long run.