Shares of this booming fintech enterprise have crushed the market so far in 2024.
Investors might be looking at the financial services industry for potential buying opportunities. There is no shortage of companies to choose from, ranging from the massive banks and card networks to the smaller finance firms carving out their own special niches in the sector.
Perhaps it’s a good idea to look outside of the U.S. at a business called Nu Holdings (NU -4.46%). Its shares have soared 72% this year alone (as of Sept. 4). But is this budding Latin American fintech stock a smart buy right now?
Nu’s rapid rise
According to its management team, Nu is the largest digital banking platform outside of Asia. It offers various financial services products, like checking accounts, a brokerage platform, credit cards, and insurance, all via its mobile app. Nu has a big presence in Brazil, its home market, as well as Mexico and Colombia.
Nu doesn’t operate any physical bank branches. And it leans heavily on technology to provide customers with a better user experience. This helps explain why growth has been so fantastic, propelled by the prevalence of the internet and smartphones in the countries it operates in.
During the three-month period that ended June 30, Nu generated $2.8 billion in revenue, a figure that was up 65% year over year. And the business now counts 105 million customers. That represents a nearly tenfold jump from the same period in 2019 prior to the pandemic.
What’s also remarkable is that it only costs Nu $7 to acquire a new customer and less than $1 per month to service them. Yet in the past four quarters, the average revenue per active customer was $43.20. These are tremendous unit economics, highlighting how every additional user is financially beneficial to the business.
A digital-first setup means Nu can scale up in an extremely profitable manner. The company more than doubled net income to $487 million in the second quarter, resulting in a margin of 17%, much better than the 12% posted in Q2 2023. All metrics point to a company that is firing on all cylinders as it gains broader adoption.
It’s not unreasonable to expect the fast growth to continue. Latin America is a big region with a population exceeding 650 million people. Even better for Nu, it is estimated that 70% of the population is unbanked or underbanked in the region. As per-capita incomes hopefully rise over time, these consumers will start to require banking tools. Nu will be there to provide the products and services that they need.
Nu’s valuation
Usually, if you see a business posting strong revenue and earnings growth even remotely in the same ballpark as Nu is, then you’re probably expecting the valuation to be in nosebleed territory. But that’s not the case here.
As of this writing, shares are trading just 5% off their all-time high from. And they’re far above the initial public offering (IPO) price from December 2021. The stock can be purchased at a forward price-to-earnings ratio of 34.6, significantly below the historical average multiple of 71.6.
Nu is expected to increase revenue and earnings per share at compound annual rates of 32% and 55%, respectively, between 2023 and 2026. This exciting outlook, which should still be taken with a grain of salt, is certainly encouraging.
If Nu’s growth prospects, profitability, and valuation all aren’t enough to convince investors that the stock is a smart buy, then consider that Warren Buffett-led Berkshire Hathaway has been a shareholder since the IPO almost three years ago. That’s yet another reason to consider adding this fintech enterprise to your portfolio.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.