Nu Holdings (NU 2.22%) is a digital bank that has disrupted 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 counts Berkshire Hathaway among its investors.
The consumer finance company is expanding its footprint into other key markets in Latin America, including Mexico and Colombia. However, it’s been a rocky road 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 shares trading below $14 per share, is it time to buy the dip on Nu Holdings?
Nu Holdings has opened up banking to millions in Brazil
For many years, Brazilians lacked access to an inclusive banking system. Five banks dominated 80% of Brazil’s financial assets, effectively operating as an oligopoly and imposing exorbitant fees on customers. Five years ago, people faced interest rates as high as 160% on credit card loans and 100% on personal loans.
This was a pain point that Nu Holdings co-founder and Chief Executive Officer David Vélez looked to address. Thanks to regulatory changes, Nu had an opportunity to disrupt the banking situation Brazilians had to face.
The company introduced a digital-only neobank model that operates without any physical branches. With significantly lower overhead costs, the company could offer free accounts and credit cards without annual fees and reduce borrowing costs, resulting in incredible growth since its launch.
Since 2020, Nubank has increased its customer base from 24 million to nearly 99 million today, or more than 56% of Brazil’s adult population. Over the past several years, the number of Brazilians without a bank account went from 16.3 million to 4.6 million, or about 3% of the country’s adult population.
Image source: Getty Images.
The fintech is expanding across Latin America
Nu’s remarkable growth could be in the early stages as the company sets its sights on expanding throughout Latin America. By entering the markets of Mexico and Colombia, Nu is embracing 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, showcasing an 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, equating to around 66 million individuals. 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 Q3 alone, Nu raked in $553 million in profit — an impressive 82% increase compared to the same time last year and a solid 13.5% rise from the previous quarter.
Credit has been one point of concern among investors
Nu is experiencing rapid growth, but its stock has recently fallen out of favor with investors, as indicated by its 29% decline. Despite solid growth, some investors are concerned that the stock price rose too quickly, making its valuation too rich. In late October 2024, before the recent sell-off, Nu was trading at around 48 times earnings and over 10 times its sales. Now, the stock is priced at approximately 31 times its earnings and 7 times its sales.
NU PE Ratio data by YCharts. PE = price-to-earnings. PS = price to sales.
There are growing concerns about a slowdown in credit card and personal loan activity in Brazil. Notably, 90 days or more delinquent non-performing loans increased to 7.2%, up from 6.1% just a year earlier. Additionally, the company recorded $1.6 billion in write-offs, a significant increase from approximately $957.6 million in write-offs one year earlier.
Following a period of strong growth, credit card receivables growth has also slowed down. Currently, this stands at $15.2 billion, which is only slightly higher than the $14.5 billion reported at the end of 2023. In Q3, Berkshire Hathaway trimmed its position in Nu by 19% and now holds 86.4 million shares in the fintech.
What’s next for Nu?
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. Recently, it introduced NuCel, a mobile phone service, to diversify beyond financial services.
This multi-faceted approach enables Nu Holdings to leverage its large customer base in Brazil, creating a digital ecosystem that promotes cross-selling opportunities. Vélez stated: “I believe the opportunity to move beyond financial services by adding various verticals is significant.” Ultimately, Nu aims to reduce the cyclicality of its revenue streams and decrease its reliance on credit for sustained growth.
Is it a buy?
Investors will want to watch Nu’s loan growth and loan portfolio. While the recent rise in delinquencies has been within management’s expectations, further upticks could ultimately affect the company’s bottom line.
That said, Nu continues to grow at an impressive rate, and the potential for continued expansion in previously underserved markets makes it appealing. 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 for long-term investors to scoop up today.
