Nu Holdings(NYSE: NU) is a digital bank that has revolutionized the traditional banking sector in Brazil. The region was once known for its limited options and outrageous customer fees, making banking inaccessible to many residents. However, with its innovative approach to banking, Nu has taken a dominant position and has Berkshire Hathaway among its investors.
The consumer finance company is expanding its presence to other key markets in Latin America, including Mexico and Colombia. However, it’s been a rocky ride for the stock recently, as concerns around its credit grow. On top of that, Berkshire trimmed some of its position and the stock is down 29% from its recent 52-week high.
With the stock trading below $14 per share, is it time to buy the dip in Nu Holdings?
For many years, Brazilians lacked access to an inclusive banking system. Five banks controlled 80% of Brazil’s financial assets, effectively operating as an oligopoly and imposing exorbitant fees on clients. Five years ago, people faced interest rates of up to 160% on credit card loans and 100% on personal loans.
This was a pain point that Nu Holdings co-founder and CEO David Vélez sought to address. Thanks to regulatory changes, Nu had the opportunity to alter the banking situation that Brazilians had to face.
The company introduced a digital-only neobank model that operates without physical branches. With significantly lower overhead costs, the company could offer free accounts and credit cards with no annual fees and reduce borrowing costs, resulting in incredible growth since its launch.
Since 2020, Nubank has grown its customer base from 24 million to nearly 99 million today, or more than 56% of Brazil’s adult population. In recent years, the number of unbanked Brazilians has risen from 16.3 million to 4.6 million, or about 3% of the country’s adult population.
Image source: Getty Images.
Nu’s notable growth could be in its early stages as the company aims to expand throughout Latin America. By entering the markets of Mexico and Colombia, Nu is harnessing the potential of two of the largest economies in the region.
In the third quarter, Nu’s customer base jumped to 2 million in Colombia and 8.9 million in Mexico, showing incredible growth of 150% and 106%, respectively, compared to the same quarter last year. Recent data from Susquehanna Financial Group shows that 51% of Mexico’s population remains unbanked, equivalent to around 66 million people. That offers an immense opportunity for Nu to win the hearts of new customers.
Nu is on a roll, having achieved seven consecutive quarters of net income growth. In the third quarter alone, Nu made $553 million in profits – an impressive 82% increase compared to the same period last year and a solid 13.5% increase from the previous quarter..
Nu is experiencing rapid growth, but its stock has recently fallen out of favor with investors, as indicated by its 29% drop. Despite the strong growth, some investors are concerned that the share price has risen too quickly, making its valuation too high. As of late October 2024, before the recent sell-off, Nu was trading at around 48 times earnings and more than 10 times sales. Now, the stock is priced at about 31 times its earnings and 7 times its sales.
NU PE ratio data from YCharts. PE = price-earnings ratio. PS = selling price.
There is growing concern about a slowdown in credit card and personal loan activity in Brazil. Notably, delinquent loans 90 days or more increased to 7.2%, up from 6.1% just a year earlier. Additionally, the company recorded $1.6 billion in cancellations, a significant increase from approximately $957.6 million in cancellations a year earlier.
Following a period of strong growth, credit card receivables growth has also slowed. Currently, this stands at $15.2 billion, slightly up from the $14.5 billion reported at the end of 2023. In the third quarter, Berkshire Hathaway cut its position in Nu by 19% and now holds 86.4 million fintech stocks.
Nu Holdings is exploring new verticals to increase its total addressable market. In recent years, the company has launched several services, including NuPay, NuTravel and NuMarketplace. It recently introduced NuCel, a mobile phone service, to diversify beyond financial services.
This multifaceted approach allows Nu Holdings to leverage its large customer base in Brazil, creating a digital ecosystem that promotes cross-selling opportunities. Vélez said: “I think the opportunity to go beyond financial services by adding various verticals is important.” Ultimately, Nu aims to reduce the cyclicality of its revenue streams and reduce its dependence on credit for sustained growth.
Investors will want to watch Nu’s growth and loan portfolio. While the recent increase in delinquencies has been within management’s expectations, further increases could ultimately impact the company’s results.
That said, Nu continues to grow at an impressive rate and the potential for continued expansion into previously underserved markets makes it attractive. Its rapid growth and higher valuation make the stock vulnerable to volatility, so it may not be suitable for more conservative investors. However, after the recent sell-off, I think Nu is a solid growth stock that long-term investors can own today.
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Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has posts and recommends Berkshire Hathaway. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.
Should you buy Nu Holdings while it is below $14? was originally published by The Motley Fool
