To The Moon

$Nu Holdings Ltd.(NU)$ widely known as Nubank and one of the largest digital financial services platforms globally, experienced a significant share price drop of over 5%. This decline positioned it as the weakest performer among US-listed companies with a valuation exceeding $50 billion. Nubank serves an expansive customer base of 110 million across Brazil, Mexico, and Colombia.

Nu Bank has been one of the fastest-growing companies in the stock market, with its stock surging over 200% since its 2022 lows. The business continues to expand at a remarkable pace. However, the stock has recently fallen 26% from its all-time highs, prompting increased interest from investors. we’ll cover why the stock is down, the company’s strengths, its growth trajectory, and whether it presents a buying opportunity today.

Earning & Revenue

• Net Income: The company reported a net income of $288.5 million for the same quarter, representing an 82% year-over-year growth.

• Earnings Per Share (EPS): Earnings per share stood at $0.05, aligning with analysts' expectations.

• Total Revenue: In Q3 2024, Nu Holdings achieved total revenue of $2.62 billion, marking a 92.33% increase compared to the same period in the previous year.

• Net Interest Income (NII): $1.46 billion, representing a slight sequential decline, particularly in the credit card segment.

Why is Nu Bank’s Stock Down?

On November 28, Brazil announced plans to cut government spending by approximately $122 billion to combat inflation, aiming to bring it down to 3%. Persistent high inflation has devalued the Brazilian real, which has dropped to a five-year low against the US dollar, down 32% over that period. This currency devaluation poses challenges for companies like Nu Bank and MercadoLibre (MELI), which earn revenue in reals but report financials in US dollars. The weaker real results in lower reported earnings in USD.

Additionally, JP Morgan projects Brazil’s interest rates could reach 14%, with 10-year government bond yields already hitting 13.5%. High interest rates make bonds more attractive than stocks, as investors can achieve double-digit risk-free returns. This dynamic pressures Brazilian stocks like Nu Bank, which must offer returns that compete with these high bond yields. For example, Warren Buffett noted during the 1981 U.S. high-interest-rate era that stocks under performing passive rates (e.g., 20% government bonds) were economically unattractive to investors.

On top of these headwinds, Citi recently lowered its price target for Nu Bank to $11 per share and rated the stock as a sell, further weighing on the stock price.

Nu Bank’s Fundamentals

Despite these challenges, Nu Bank's fundamentals remain robust:

• Customer Growth: Nu Bank now has 110 million customers, a 20% year-over-year increase, with a 56% share of Brazil’s adult population.

• Revenue and Income Growth: Revenue is up 56% year-over-year (FX-neutral), and net income has more than doubled, with a 30% return on equity.

• Profitability: Despite some slowdown in revenue growth (8% quarter-over-quarter, FX-neutral), net margins are expanding, reaching $592 million in net income last quarter.

• Stock Price: As of December 3, 2024, Nu Holdings' stock price is $12.00, with an intraday high of $12.90 and a low of $11.55.

• Market Capitalization: The company has a market cap of approximately $68.4 billion, reflecting its substantial market presence.

Profitability Ratios:

Return on Equity (ROE): The company achieved an ROE of 26.31% in 2023, up from 18.24% in 2022, indicating improved efficiency in generating profits from shareholders' equity.

Return on Assets (ROA): ROA increased to 4.22% in 2023 from 2.81% in 2022, reflecting better utilization of assets to generate earnings.

Challenges

• Loan Performance: Non-performing loans over 90 days are rising (7.2%), but Nu Bank’s coverage ratio of 212% indicates strong financial health.

• Growth Deceleration: Quarterly revenue and gross profit growth are slowing, reflecting challenges in maintaining momentum in a high-growth business.

• Slowing Growth in Key Markets: Brazil has been a primary driver of Nubank’s growth, but recent reports indicate a slowdown in critical metrics like net interest income (NII) and net interest margin (NIM). This decline could impact overall profitability.

  Customer Metrics: Average revenue per active customer (ARPAC) saw a sequential decline, signaling potential issues in monetizing its growing user base.

• High Funding Costs: Rising interest rates in markets like Brazil and Mexico have led to higher funding costs, which can squeeze margins, particularly in lending operations.

• Risk-Adjusted Margins: A drop in risk-adjusted NIM indicates potential inefficiencies or increased risk in its lending portfolio.

• Nubank has relied heavily on credit cards and personal loans, especially in Brazil, as key revenue streams. With these segments facing growth headwinds, alternative products like payroll loans may take time to scale up and offset the slowdown.

• Rapid Scaling Risks: Nubank's expansion to new markets like Mexico and Colombia involves significant investment and execution risk. Cultural, economic, and market dynamics vary across regions, complicating uniform scaling strategies.

• Customer Retention vs. Acquisition Costs: While growing its user base is a strength, maintaining profitability while scaling could become a challenge if acquisition costs rise disproportionately to revenue growth.

Valuation Insights

Using an annualized revenue figure of $11.76 billion and assuming a conservative net margin of 28% (comparable to mature banks like JP Morgan), Nu Bank’s profit potential is estimated at $3.3 billion. At a market cap of $59.5 billion, this implies a price-to-earnings ratio of about 18—reasonable for a company growing at Nu Bank’s pace.

Price-to-Earnings (P/E) Ratio: As of 2023, the P/E ratio was 39.05, indicating that investors are paying $39.05 for every dollar of earnings, which may suggest high growth expectations.

Price-to-Book (P/B) Ratio: The P/B ratio stood at 8.75 in 2023, reflecting a premium valuation relative to the company's book value.

A DCF analysis, assuming 15% annual growth, indicates a potential compound annual growth rate of 17.7% for investors. While uncertainties persist around Brazil’s economic policies and consumer behavior, the stock appears reasonably priced given its strong growth and long-term runway.

Investment Thesis

Growth Potential in Underbanked Markets

• Large Addressable Market: Nubank operates in Latin America, where millions remain underbanked or unbanked. Its streamlined digital-first model allows it to efficiently reach these customers, bypassing traditional banking hurdles.

• Customer Base: With over 110 million customers across Brazil, Mexico, and Colombia, Nubank is well-positioned to capitalize on the increasing penetration of smartphones and internet access in the region.

• Market Share Expansion: Its strong brand and customer-centric approach have enabled rapid market share gains, especially in Brazil.

Macroeconomic Tailwinds

• Digital Transformation: The pandemic accelerated digital adoption across Latin America, benefiting fintechs like Nubank.

• Economic Inclusion: Governments and policymakers in the region are actively promoting financial inclusion, creating opportunities for fintech growth.

Strong Financial Backing

• Solid Funding Base: With backing from global investors like Berkshire Hathaway, Nubank has the financial strength to continue investing in growth and weather economic challenges.

• Cash Flow Potential: As Nubank matures, its scale and efficiency are expected to drive improved profitability and cash flow.

Risks to Consider

While Nubank offers substantial upside potential, investors should be aware of:

• Valuation Concerns: The stock trades at high multiples, reflecting significant growth expectations that may be challenging to meet.

• Regulatory Risks: Operating in multiple countries exposes the company to complex and evolving regulations.

• Macroeconomic Volatility: Currency fluctuations, inflation, and political instability in Latin America could impact financial performance.

• Competitive Landscape: Increasing competition from other fintechs and traditional banks may pressure growth and margins.

Final Thoughts

Nu Bank remains on my watchlist as a high-quality, fast-growing company with significant potential. While I haven’t yet initiated a position, further declines in the stock could present an attractive buying opportunity. The fundamentals are solid, and the company’s long-term prospects remain promising, despite current macroeconomic pressures.