This Year, This Notable Buffett Growth Share has Soared by 64%, Boosting Your Investment Portfolio Significantly
Query regarding the endurance of an outstanding company's relentless expansion rates has been a topic of discussion among investors and followers of Nu Holdings (NU, -0.42%). The company has consistently seen triple-digit and high-double-digit growth in its business since its IPO in 2021, and has maintained profitability for over two years. However, the market showed some dissatisfaction with its recent earnings report, causing the stock to drop approximately 10% following the report.
Investors should not allow themselves to be unduly alarmed; the stock has still appreciated by 79% over the past year, indicating that the market remains optimistic about the company's trajectory. Let's delve into the events of the third quarter, the reasons behind investor sentiment shifts, and why this remains an opportunity not to be missed.
Expanding at a remarkable pace
By most quantitative measures, the third quarter was a resounding success. Revenue for the Brazilian online bank surged 56% year-over-year (on a currency-neutral basis) to reach $2.9 billion, while net income doubled to $553 million.
Further analysis reveals that the company is adding customers at an accelerated pace and witnessing heightened customer engagement. In the third quarter, Nu added 5.2 million new customers to its platform, bringing the total number of customers to 109.7 million, a 23% year-over-year increase. The addition of 1.1 million customers in Brazil alone, reaching 98.8 million by the end of the quarter, has since surpassed the 100-million mark.
The quickest growth is being observed in the company's newer markets, where it is still in its infancy. In Mexico, Nu added 1.2 million new customers, reaching 8.9 million. Its customer base in Colombia surpassed the 2 million mark.
Furthermore, most of Nu's reporting is influenced by its operation in Latin America yet is reported in U.S. dollars. The average revenue per active user remains a key performance indicator for the company, and it remained stable at $11 during the quarter. Despite being reported in U.S. dollars, this figure increased by 25% year-over-year when adjusted for currency fluctuations. Management indicated that the revenue per active user has already reached $25 for more mature customers, suggesting that customers who stay with the platform tend to spend more on a wider range of higher-priced products. The activity rate reached 84% in the third quarter.
As a digital-native company with a distinct technological advantage, Nu benefits from greater agility and reduced costs compared to legacy banks. This advantage is amplified further due to the company's region, which was traditionally served by a limited number of large, exclusive, and highly regulated banks. Nu's cost of providing services was $0.80 in the third quarter.
The credit business also showed impressive strength. The total loan portfolio increased by 47% compared to the previous year, reaching $20.9 billion. Loan originations increased by 79%, while deposits climbed by 60% and net interest income increased by 63%.
Reasons for market unease
Although Nu has managed to largely sidestep the macroeconomic pressures affecting Brazil, the country's recent interest rate hikes, in light of persistently high inflation, paint a more challenging outlook. This unfavorable climate is compounded by Nu's decelerating growth, despite surpassing expectations in the third quarter.
The current growth rates and revised expectations are causing changes in the short-term outlook, which is contributing to the stock's price decrease, albeit not significantly. This downward trend primarily reflects a readjustment of short-term expectations and valuation, as Nu's stock has been trading at a reasonable price. However, if growth continues to slow, the valuation could become unwarranted if the stock price continues to rise.
Remains a worthwhile investment
With robust performance and a more attractive price, Nu stock presents an even more enticing investment opportunity at present. The company is currently trading at a forward P/E ratio of 23, which is an appealing offering for an investment with high growth potential. Furthermore, Wall Street analysts expect revenue to grow by approximately 43% in 2024 and EPS to almost double this year, with another 50% increase expected in 2023.
Nu continues to deliver impressive results despite various external challenges, and it boasts vast potential for further expansion. Let the short-term factors not deter you; if you have a long-term investment outlook, Nu remains an excellent buy at the moment.
Despite the temporary dip in investor sentiment following Nu Holdings' recent earnings report, the company's robust third-quarter performance, characterized by a 56% revenue growth and a doubling of net income, indicates a strong financial position. The company's ability to add customers at an accelerated pace and witness heightened engagement, along with its impressive growth in newer markets, underscores its potential for further expansion.
In light of Nu's forward P/E ratio of 23, which is considered appealing for an investment with high growth potential, and Wall Street analysts' expectations of significant revenue and EPS growth in the coming years, Nu continues to present an attractive investing opportunity for those with a long-term outlook. Investors should consider allocating funds towards the finance sector, given the company's consistent money-making capabilities and investing in Nu Holdings' shares.
