Potential investors are currently eyeing the financial services sector for attractive buying opportunities. The industry offers a diverse array of options, from giant banks and card networks to smaller financial firms that are establishing unique niches.
One intriguing prospect outside of the U.S. is Nu Holdings (-4.46%), a Latin American fintech company. Its stock price has surged 72% this year alone, as of September 4. But is this emerging stock a wise investment at present?
Nu’s Impressive Growth Trajectory
Nu is touted by its management as the largest digital banking platform beyond Asia. It provides a variety of financial products, such as checking accounts, a brokerage platform, credit cards, and insurance, all accessible through its mobile app. With a strong foothold in Brazil, its home market, Nu also operates in Mexico and Colombia.
The company stands out due to its absence of physical bank branches, relying heavily on technology to enhance customer experience. This approach has driven remarkable growth, fueled by widespread internet and smartphone use in its operating regions.
In the quarter ending June 30, Nu recorded $2.8 billion in revenue, marking a 65% increase from the previous year. The company now boasts 105 million customers, a nearly tenfold rise from the same period in 2019, before the pandemic.
A notable aspect is Nu’s cost-efficiency in customer acquisition, spending just $7 to acquire a new customer and less than $1 monthly to service them. Over the past four quarters, the average revenue per active customer stood at $43.20. These impressive unit economics demonstrate the financial advantage of each additional user for the company.
Nu’s digital-first model allows it to scale profitably, as evidenced by its net income more than doubling to $487 million in the second quarter, yielding a 17% margin, an improvement from the 12% margin in Q2 2023. All indicators suggest a company thriving as adoption increases.
The rapid growth is likely to persist, given Latin America’s large population exceeding 650 million, with approximately 70% being unbanked or underbanked. As per-capita incomes potentially rise, the demand for banking tools will grow, and Nu is positioned to provide the necessary products and services.
Evaluating Nu’s Valuation
Typically, a company exhibiting robust revenue and earnings growth like Nu’s would command a high valuation. However, this isn’t the case here.
Currently, shares are trading just 5% below their all-time high and are significantly above the initial public offering (IPO) price from December 2021. The stock is available at a forward price-to-earnings ratio of 34.6, much lower than the historical average of 71.6.
Nu is projected to boost revenue and earnings per share at compound annual growth rates of 32% and 55%, respectively, from 2023 to 2026. Although this optimistic forecast should be approached cautiously, it is certainly promising.
In addition to its growth potential, profitability, and valuation, another reason to consider investing in Nu is that Warren Buffett’s Berkshire Hathaway has been a shareholder since its IPO nearly three years ago, adding further credibility to this fintech venture.
