Contemplating Nu Holdings Shares: Should You Purchase, Sell, or Maintain?
Contemplating Nu Holdings Shares: Should You Purchase, Sell, or Maintain?
Nu Holdings (NU, up 3.20%) has made a significant impact in the Brazilian banking sector and is now attempting to expand its footprint across Latin America.
Regardless, this expansion path hasn't been without hurdles, and the stock's behavior has shown notable instability as Nu maneuvers the intricacies of fast-paced growth in emerging markets. The stock price has soared by 44% so far in 2024, but investors might ponder if this surge will persist or if it's time to cash out. Should investors buy, sell, or hold Nu stock at this moment?
Nu's remarkable growth
Historically, Brazilian consumers had limited financial choices as five major banks claimed around 80% of the nation's financial assets. Former Finance Minister Paulo Guedes dubbed Brazil's banking sector a "cartel" due to the exorbitant fees it charged, with credit card interest rates reaching an eye-watering 160%.
However, government regulatory changes opened up opportunities for challengers like Nu, which went public in 2021. The digital-only bank, Nubank, commenced operations in 2013 and disrupted traditional banking models by providing free digital accounts and credit cards without annual fees, luring millions of clients. In the process, it decreased Brazil's unbanked population from 16.3 million to just 4.6 million.
Nubank's popularity has witnessed exponential growth in recent years, with its customer base swelling from 24 million in 2020 to an astounding 98.8 million currently (representing over 56% of Brazil's adult population). Beyond simply attracting new clients, Nubank has demonstrated an impressive capacity for maximizing value from its existing customer base. In the third quarter, its average revenue per active customer increased by 10% compared to the previous year.
Expansion into new Latin American markets
Nu's earnings remain robust, with the company reporting growing net income for seven consecutive quarters. In the third quarter, it reported a profit of $553 million, up 82% from the previous year and 13.5% from the preceding quarter.
Nu's growth in Brazil is indisputable, and it now turns its attention to the broader Latin American market. Its current focus is on expanding into Mexico and Colombia, recognized as two of the largest markets in Latin America.
During the third quarter, Nu's Colombian client base swelled by 150% year-over-year to 2 million, while its Mexican client base surged by 106% to 8.9 million. A recent analysis from Susquehanna Financial Group highlighted that 51% of Mexico's population remains unbanked, equating to around 66 million individuals. This represents a significant opportunity for Nu.
Nu's future prospects
Beyond its geographical expansion plans, Nu Holdings also aims to diversify into new verticals. Services it has introduced recently include NuPay, NuTravel, and NuMarketplace. Lately, it has launched NuCel, a mobile phone service, to broaden its offerings beyond financial services.
By creating a broader digital ecosystem that facilitates cross-selling opportunities, Nu Holdings is capitalizing on its substantial customer base. According to Nu's CEO David Vélez, "The opportunity to extend beyond financial services by incorporating various verticals is quite substantial."
Eventually, Nu aims to reduce the volatility of its revenue streams and lower its reliance on credit for sustained growth.
Nu: Buy, sell, or hold?
A common criticism of Nu recently has been its lofty valuation. Earlier this year, the financial services company traded at around 57 times its earnings. However, its net income growth has boosted its earnings. The stock price has dropped by 25% from its recent high of $16 per share. Currently, it trades at around 32 times its trailing earnings and 19 times its projected earnings for next year.
Investors should keep an eye on Nu's loan growth and loan portfolio. In the third quarter, the percentage of delinquent loans on its books that had been overdue for 90 days or more increased to 7.2%, an increase from 6.1% in the same quarter last year. While this increase aligned with management's expectations, further escalations could affect the company's bottom line.
That being said, Nu continues to expand at an impressive pace, and its potential for growth in underserved markets makes it alluring. The stock's rapid expansion and high valuation make it vulnerable to heightened volatility, so it may not be suitable for more risk-averse investors. However, after its recent dip in price, I believe Nu is an attractive growth stock that long-term investors should take into consideration.
Given Nu Holdings' expansion plans into Mexico and Colombia, which are two of the largest markets in Latin America, investors might consider the potential for increased revenue and customer base growth. If Nu can successfully navigate these new markets, it could lead to significant returns. However, the increase in delinquent loans overdue for 90 days or more may pose a risk to Nu's bottom line and should be closely monitored. Therefore, investors looking for growth and willing to tolerate volatility might find Nu an attractive prospect. In terms of investing in finance, allocating some funds towards Nu Holdings could potentially yield favorable results, but thorough research and risk assessment are essential.