It feels like the share price of this fast-growing fintech has gone too far, too fast.
All investors would obviously prefer to buy stocks at discounted prices. Most also understand, however, that often, you have to pay a premium for quality.
This presents something of a conundrum for anyone who currently has Nu Holdings (NU 1.21%) on their watch list. See, the stock is up by a frothy 250% just since the beginning of 2023. Although it began this big run-up with the advantage of being well below its late-2021 public offering price, the scope and pace of this bullishness still might leave would-be shareholders wondering if the rally has already run its course.
Good news — it probably hasn’t.
Nu Holdings, up close and personal
It’s likely that most folks in the U.S. have never even heard of Nu Holdings. If you lived in Brazil, Mexico, or Colombia, however, you’d almost certainly be familiar with the brand. In May, the Brazilian-based fintech topped 100 million customers for the first time. Among the digital banking services it provides them are bank accounts, payment cards, lending, and investing services. For nearly 60% of its customers, Nu is their primary bank.
It’s been quite the growth machine of late, too. In the first quarter, revenue rose 64% year over year to $2.7 billion, driving net income up 136% to $443 million. That extended a red-hot growth streak that first took shape in 2019.
NU Revenue (Quarterly) data by YCharts.
More of the same is likely in the cards. Nu’s top line was just over $8 billion in 2023, and the consensus view estimate among the analyst community is that it will grow to about $12 billion this year en route to $15 billion in 2025. Earnings are expected to roughly triple during this stretch.
The thing is, there’s no reason to think the company can’t meet these lofty expectations.
Right place, right time, right product
To most U.S. investors, Nu will feel like just another online banking name, in the same vein as SoFi and Ally Financial. No biggie. Such companies are relatively common now, and competition in the space is being rounded out by traditional brick-and-mortar banks wading deeper into the digital banking waters.
That’s not the case in Latin America, though. In many ways, where that market is now is where the North American market was a couple of decades ago. Broadband internet connectivity is still relatively new, as are smartphones. These technologies serve as the foundations that must first be laid before digital banking can truly take hold.
Numbers from Standard & Poor’s help put things in perspective. The company’s Kagan research group reports that the broadband penetration rate in Latin America’s residential fixed segment only edged past the 50% mark last year. Meanwhile, GSMA Intelligence reported that as of the end of 2023, 418 million people in Latin America — about 65% of its population — were users of mobile internet services.
Both numbers are growing, though, with plenty of room for more of it. GSMA predicts there will be 485 million mobile internet users in Latin America by 2030 following last year’s 8.4% uptick in the region’s fixed-broadband subscriptions. In the same vein, Americas Market Intelligence predicts Latin America’s e-commerce industry is set to grow to the tune of 24% this year, and then grow by another 21% next year.
So Latin America’s consumers are increasingly going online at home as well as away from home. They’re increasingly spending money online, too. Online banks will be the next big beneficiaries of these trends.
No, it’s not too late to buy Nu stock
Nu Holdings isn’t Latin America’s only interesting fintech name. MercadoLibre is in the mix as well, as is StoneCo. While they aren’t carbon copies of Nu, each will benefit from the region’s rising tide of broadband connections and the subsequent swell in demand for digital banking services.
Even after Nu’s big rally over the past year and a half, however — and even though the stock currently trades above its consensus price target of $12.77 — it remains one of the more attractive ways to plug into this international opportunity. Based on its projected earnings growth, it should justify its rich valuation sooner than later.
For those seeking big-name validation of the thesis here, Warren Buffett’s Berkshire Hathaway is a major stakeholder in the company. Berkshire established its 107 million share position (about 3% of Nu) shortly after Nu’s December-2021 initial public offering, in fact, holding onto it through its big post-IPO pullback in 2022. Perhaps Buffett and his team recognize that Nu’s current customer base of just over 100 million people is only a fraction of Latin America’s population of 670 million.
Bottom line: There are plenty of opportunities ahead for this online bank whenever it’s ready to turn up the heat on its growth efforts. In the meantime, it’s doing quite well by just focusing on a narrow sliver of its market.
Ally is an advertising partner of The Ascent, a Motley Fool company. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, MercadoLibre, and StoneCo. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.