Growth stocks come with pros and cons. They can supercharge a portfolio, but they often come with a lot of risk. If you invest in growth stocks, make sure to buy a basket of different ones -- you won't know which will climb and which will crash. Diversify further by owning safe and secure stocks to balance them out.
However, your best bet is buying growth stocks that don't come with a lot of risk. Think they don't exist? Check out Nu Holdings (NU 1.44%).
Changing finance in an underpenetrated region
Nu is a digital bank based in Brazil and also serving Mexico and Colombia. It's been in business in Brazil for about 10 years, and although it's firmly established there, it's still growing at a rapid pace.
Overall, revenue increased 64% to $2.7 billion in the 2024 first quarter. It added 5.5 million customers in the quarter for a total of 99.3 million, with monthly add-ons in Brazil of 1.3 million customers. It has more than half of the adult population there as customers and is now the fourth-largest financial institution in Latin America by customer count.
Net income increased from $141.8 million last year to $378.8 million this year in the first quarter. That was partially driven by a robust credit unit, which is quickly becoming a key element of its growth strategy. Deposits increased 53% year over year in the first quarter to $24.3 billion while cost of deposits was 84% of interbank rates. The interest-earning portfolio increased 86% to $9.7 billion. Net interest income soared 93% to $1.6 billion, while net interest margin widened to 19.5%.
Its cross-selling strategy is also leading to profitability at scale. Average revenue per active customer (ARPAC) increased from $8.60 to $11.40 in the quarter as customers purchased more products and more expensive products, while cost to serve remained relatively steady at $0.90.
New market = new opportunities
Most of Nu's business still comes out of Brazil, but it's making a concerted effort to break into Mexico and Colombia. So far, Mexico's growth is outpacing Brazil's at a similar phase on just about every metric. Nineteen quarters after launch, it has a 5.1% market share in terms of customers in Mexico and 2.4% of bank accounts. It has 1.2% of the market share for deposits and total revenue of $149 million.
Even though it's been operating in Mexico for several years, it only recently received a bank charter. It rolled out its savings account product last year, so it's still accumulating the benefits. It's also in the process of rolling out in Colombia. It's not profitable in these countries, but high profitability in its more mature market of Brazil is picking up the slack and allowing Nu to comfortably get started in these other markets, which present high-growth opportunities. Nu added 1.5 million accounts in Mexico in the first quarter for a total of 6.6 million, while it has 900,000 customers in Colombia.
Is it really risk-free?
No stock is risk free. Nu faces intense competition in Mexico and is only getting started in Colombia. While so far things are going well, these are unknowns right now.
Nu also operates in countries not necessarily known for economic stability. Brazil has had high inflation and interest rates. Nu's savings product that recently launched in Mexico has a rate of 14.75% to beat the government interest rate of 11%. Brazil's profitability will cover these new ventures for now, but not forever.
In its favor, I would add that Nu has the support of Warren Buffett and the Berkshire Hathaway team, and that says a lot about its risk. Buffett isn't much into risky stocks, and Berkshire Hathaway invested in Nu even before it became a public company and before it was profitable. Do your own due diligence, but I think it's fair to say that if Buffett believes in it, the risk is probably low. So far, he's been proven right as Nu scales profitably and with strong growth. Investors should expect these trends to continue, making Nu the ultimate growth stock. With its price tag under $12, $500 will get you a large position that could explode in the coming years.
