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Is Nu Holdings Stock a Buy?

Nu Holdings (NU 1.21%) dominates the Brazilian banking market and has a massive growth opportunity across Latin America to serve unbanked and under-banked populations.

The Brazilian fintech has taken investors on a volatile ride since its 2021 initial public offering (IPO) as it grapples with growth in the emerging-market economy. In the last year, Nu stock has surged 53% higher. As Nu aims to replicate its success across other regions of Latin America, is now the time to buy?

Solving Brazil’s banking problem

For years, Brazilians grappled with a broken banking system that saw five banks control 80% of Brazil’s financial-system assets. Operating as an oligopoly, these banks charged customers outrageous fees, which former Brazilian finance minister Paulo Guedes called a “cartel” that demanded “absurd” interest rates on loans.

Just four years ago, credit card rates in Brazil were as high as 160% annually, while personal loans commanded interest rates of 100%. The wide gap between loans to customers and Brazil’s benchmark interest rate made the country’s banking system one of the most profitable in the world, according to S&P Global. However, it also left many of its citizens unbanked, without a bank checking or savings account.

Regulatory changes have helped improve access to banking and encouraged neo-banks, such as Nubank (the banking subsidiary of Nu Holdings), to enter the market. Nubank appealed to customers with free digital accounts and credit cards with no annual fees. In the past few years, Brazilians without a bank account went from 16.3 million to 4.6 million, or about 3% of the country’s adult population.

Nu’s impressive growth

Nu’s emergence in Brazil caught the attention of Berkshire Hathaway, which added 107 million shares of the bank following its December 2021 IPO. It still holds those shares today.

It hasn’t always been smooth sailing for investors. Nu stock plummeted as much as 73% in the six months following its IPO as it scaled up and accumulated significant losses along the way. In 2021, the fintech bank lost $165 million; a year later, it lost another $365 million.

Nu wasn’t squandering its money, though. Instead, it was adding customers at an astonishing pace. Since the start of 2020, the bank’s customer count in Brazil has grown from 23.5 million to nearly 92 million through March 31st. Nubank now serves 54% of Brazil’s adult population.

Things are looking up for the bank. Over each of the past five quarters, Nu has grown its net income quarter over quarter. Last year, its net income surged to over $1 billion on $7 billion in total revenue. The positive trend continued in Q1 this year, with the neobank posting a record $379 million in income.

Nu has done an excellent job expanding its business by cross-selling and upselling to existing customers. In the first quarter, the average revenue per active customer jumped 29%, compared to the same period last year.

Nu is expanding across Latin America

Nu stock isn’t very cheap today, at a price-to-earnings ratio of 44.3 and a price-to-tangible-book value of 9. By these metrics, Nu is quite expensive, compared with other banks, which leaves the question of whether it’s a good investment today.

However, investing in Nu is an investment in its future growth opportunities. Nubank has set its sights on two massive market opportunities: Mexico and Columbia. In Mexico, Nubank’s customer count grew to 6.6 million in the first quarter, up 106% from just one year earlier.

Its runway for growth could be massive. Mexico is the second-largest consumer market in Latin America, and recent data from Susquehanna shows that 51% of its population, or 66 million people, are unbanked.

Is Nu Holdings a buy?

Nu has displayed excellent growth across Brazil and is chasing an opportunity to expand across Latin America. The bank is currently trading at a lofty premium, compared to traditional U.S. banks, which could lead to more volatility in the short term.

However, its high valuation reflects the bank’s significant growth potential. For patient investors willing to hold through short-term volatility, the long-term upside from here could be huge.

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