Contemplating the Purchase of Nu Holdings at Prices Under $14?
Transforming Traditions: Nu Holdings and the Digital Banking Revolution
Nu Holdings - ticker symbol NU (currently at 2.22%) - has shook up the conventional banking landscape in Brazil. Once synonymous with limited options and sky-high fees, banking in Brazil was a privilege few could afford. But with its forward-thinking approach, this digital bank has carved out a dominant position, boasting Berkshire Hathaway as an investor.
The company's focus on consumer finance has been a game-changer. Brazil was once a playground for five banks, who, in essence, operated as a duopoly, imposing hefty fees on customers. Interest rates for credit card loans could reach an astonishing 160%, and personal loans were subject to a 100% interest rate.
Nu Holdings' founders and CEO, David Vélez, identified this as a prime opportunity to disrupt the sector. Thanks to regulatory changes, they were able to deploy a digital-only neobank model, eliminating the need for physical branches. These changes drastically reduced overhead costs, enabling the company to offer free accounts, credit cards, and reduced borrowing costs, leading to exponential growth since its inception.
Since 2020, Nu's customer base has exploded from 24 million to almost 99 million – an astounding 56% growth and accounting for over half of Brazil's adult population. Furthermore, the number of unbanked Brazilians has decreased from 16.3 million to just 4.6 million, representing just 3% of the country's adult population.
Now, Nu is setting its sights beyond Brazil's borders, with expansion plans in Mexico and Colombia. The third quarter saw its customer base surge to 2 million in Colombia and 8.9 million in Mexico, showing remarkable growth of 150% and 106%, respectively, compared to the same period last year. With nearly half of Mexico's population still unbanked (equating to 66 million individuals), Nu sees ample potential for further growth.
The company's performance is nothing short of impressive, with seven consecutive quarters of net income growth. In Q3 alone, Nu even managed to rake in $553 million in profit - an incredible 82% increase from the same time last year and a 13.5% rise from the previous quarter.
Yet, Nu's stock has experienced a troubled patch recently as concerns around its credit performance surface. Investors are unsure if the stock's rapid growth and expensive valuation reflect its true worth. In fact, in late October 2024, before the selloff, Nu was trading 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.
There are concerns about deteriorating credit card and personal loan activity in Brazil. Delinquent loans have risen to 7.2%, up from 6.1% only a year ago, and the company has recorded $1.6 billion in write-offs, a significant jump from $957.6 million a year earlier. Additionally, Berkshire has reduced its Nu Holdings stake by 19%.
Despite these challenges, Nu remains bullish about its future, aiming to scale beyond financial services. Its recent introduction of NuCel, a mobile phone service, is a prime example of this diversification strategy. With Vélez believing that the opportunity to expand beyond financial services is substantial, Nu is dedicated to reducing its reliance on credit for sustained growth.
The answer to whether it's a promising time to invest in Nu remains a hotly debated topic. While concerns around credit performance should undoubtedly be paid close attention to, the company's impressive growth and potential for further expansion in underserved markets make it an attractive proposition for long-term investors. However, due to the stock's volatility and high valuation, it may not be suitable for more conservative investors.
Nu Holdings' focus on smart investments and financial innovation has been key to its growth. The company has actively sought out opportunities to diversify its portfolio, such as venturing into the mobile phone service market with NuCel.
In terms of finance, Nu's consistent net income growth and recognition from influential investors like Berkshire Hathaway have made it an appealing option for those interested in investing in digital banking revolutionaries.
