NU Holdings - Buffett's Best Kept Secret?
Second Anniversary.
I feel a sense of nostalgia as I pen my current post, on the eve of my 2nd anniversary on $Nu Holdings Ltd.(NU)$.
My first post on this Latin America bank dated back to 21 Nov 2022 after the bank has reported its Q3 2022 earnings. Click here ! to read about its roots & all, imperative to-know.
Here I am, 2 years on still covering this bank that has seen its ups & downs. Let’s go !
Preface.
Nu Holdings has taken its investors on a wild ride since its public debut in December 2021.
The Latin American digital bank went public at $9 a share, sank below $4 in 2022, and soared back to about $15 as of this writing. (see above)
Is now the right time to Buy, Sell, or Hold this fintech bank stock ?
World's Fastest-Growing Digital Banks
Nu provides (only !) online banking services, that enables it to scale up its business at a much faster rate than its brick-and-mortar competitors.
It's based in Brazil, and it also extends its banking services in Mexico and Colombia.
Facts.
According to the World Bank and Latin America Reports, > 70% of Latin America's population is still unbanked.
At the same time, World Bank also estimates that Latin America's internet penetration rate jumped from 46% in 2013 to 81% in 2023.
This makes Latin America one of the world's most fertile regions for digital banking services.
Early Bird Advantage.
Nu established an early mover's advantage in that market, and it more than tripled its customers from 33.3 million at the end of 2021 to 104.5 million by the end of Q2 2024.
During that period, Nu's activity rate (active customers divided by total customers) grew as it rolled out more services.
Its monthly average revenue per active customer (ARPAC) more than doubled, and the costs for serving those customers rose at a much slower rate. (see abpve_
Its adjusted net profit turned positive in 2021 and soared at a compound annual growth rate (CAGR) of 1,246% over the following 2 years. (see above)
Reasons to Buy and Hold.
Nu's business is maturing, but it could still have plenty of upside potential as it gains more customers and expands into more countries.
(1) Products range.
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Its credit cards and crypto trading tools should further increase the stickiness of its ecosystem.
(2) Bank’s growth.
For FY 2024, analysts expect Nu's revenue and adjusted earnings per share (EPS) to increase 40% and 68%, respectively.
For FY 2025, expectations moderated to 28% and 48%, respectively.
In honesty, these are stunning growth rates for a stock that trades at just 25x forward earnings.
(3) Long term stake.
This is probably why Warren Buffett's $Berkshire Hathaway(BRK.B)$ invested in its IPO and still holds a $1.6 billion stake in the company.
(4) Artificial Intelligence (AI) Future inclusion.
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Nu has also been beefing up its digital ecosystem with new artificial intelligence (AI) features.
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It already uses AI tools to (a) analyze customer data, (b) run financial assistance chatbots & planners, and (c) strengthen its cybersecurity defenses.
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It even recently acquired the Silicon Valley-based data intelligence company “Hyperplane” to accelerate that expansion. Those upgrades could lock in its customers and widen its moat against its regional competitors.
Reasons to Sell or Avoid.
(1) Volatile base currency.
Nu's future looks bright, but its valuations could remain compressed by (1) the currency devaluation issues and (2) Latin America’s inflationary headwinds.
The Brazilian “Real” currency has already shed nearly -30% of its value against the US dollar over the past 5 years. That pressure could continue to throttle its reported growth in US dollars.
(2) Macro Environment.
World Bank only expects Latin America's gross domestic product (GDP) to grow 1.9% in 2024 as it grapples with (i) unemployment, (ii) inflation, (iii) crime, and (iv) aging populations.
Those macro challenges could cause many investors to broadly shun Latin American stocks.
(3) Competition.
Nu also faces a lot of competition from $MercadoLibre(MELI)$, the Latin American e-commerce leader, that owns the Mercado Pago digital payments platform.
MELI has been expanding Mercado Pago's ecosystem with more credit card and crypto trading services, and it's trying to consolidate its digital wallet and fintech services into a unified digital banking platform in Mexico.
If MELI launches its own digital bank, it could become a major threat to Nu.
Verdict ?
Nu faces near-term macro and competitive headwinds, but its core business is still firing on all cylinders.
If you still believe this hot fintech company can:
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Maintain its early mover's advantage,
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Expand into more countries, and
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Continue to lock in unbanked customers,
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While pulling people away from traditional banks,
Then it's still a great time to Buy & Hold this stock.
Latest News Article.
On 6 Sep 2024 the BT post has an update on NU bank.
While it lauded on the bank’s amazing customer growth trajectory and penetration rate in just over a decade, it cannot help but be worried about the bank’s aggressive lending practices.
It feels unsustainable given that:
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NU’s loan portfolio has grown by 28% YoY which “boosts” the bank’s profits but also increased risk exposures.
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NU’s non-performing loans reached a record high of 7% in Q2 2023 vs industry average standard of 5.5%. Despite the bank’s assurance that its strategy is sound, this remains a concern.
Some critics like:
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Persevera Asset Management to sell its entire stake in NU bank.
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Banks - $JPMorgan Chase(JPM)$ & $UBS Group AG(UBS)$ have downgraded the bank’s rating.
Future Outlook
With Brazil looking to increase its interest rates, the risk of further defaults increases proportionally.
This could be additional strain on Nubank's financial health.
Poor financial literacy in many Brazilians could contribute to higher default rates.
While Nubank has been successful in attracting new customers, it must also focus on managing risk and ensuring the long-term sustainability of its business.
My Viewpoints: (mine only)
NU Bank Presence.
There are a total of 20 countries in Latin America.
Namely - Argentina*, Bolivia, Brazil*, Chile*, Colombia*, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico*, Nicaragua, Panama, Paraguay, Peru*, Puerto Rico, Uruguay* and Venezuela.
Digital banks can be found in 7 of 20 countries, denoted by “*”.
Of the 7 countries, Nu bank operates in 3 of them - Brazil, Colombia and Mexico.
Using simple inference, Nu bank have the opportunity to expand into remaining 17 countries, biz-viability permitting.
On “currency challenge” and “competition from MELI” - honestly are there any banks out there that do not face similar challenges ? Of course, not !
Latin America - Working population.
In 2023, The Economic Commission for Latin America and the Caribbean (ECLAC) estimated that there are 331 million working adults in Latin America, that is 50.8% of the region's total population.
It is projected that by 2050, the labour force will grow by +71.7 million to 402.7 million.
This works out to about 2.66 million people will join the work force yearly from 2024 to 2050.
As of end Q2 2024, its customer base stands at 104.5 million,
The ability to grow its customer base remains viable, although it may tapers over time.
Latin America - Top Industries.
Latin America boasts a diverse economy, with several key industries driving its growth and global influence.
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Agriculture and Agribusiness.
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Mining.
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Oil and Gas.
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Manufacturing.
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Technology and Telecommunications.
With on-going unrest in Europe and Middle East, Latin America’s lifeline industries will continue to be important to world economies in the short to medium term.
Latin America - Economic Outlook.
On 9 Oct 2024, the World Bank Group has released its Economic Outlook report on Latin America & the Caribbean.
World Bank, Vice President for Latin America and the Caribbean, Carlos Felipe Jaramillo noted:
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The region has made strides in managing inflation and stabilizing its macroeconomic environment.
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This is a crucial moment to leverage these achievements.
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And attract the investments necessary for sustainable development, foster innovation, build human capital, create more and better jobs.
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It is time to empower the region to break free from its 1.9% low-growth rate (2024) that has exceeded previous estimates.
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The region is forecast to grow 2.6% in 2025.
As long as relationship between US & China remains frosty, it plays to Latin America favour, to put it bluntly. For that, NU still has its role cut out for the Latin America’s economies. True ?
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Do you think the prospect for Latin America economies remains bright ?
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Do you think NU bank will be able to report another stellar Q3 2024 earnings on 13 Nov 2024, after market closing ?
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