Nu Holdings (NU +2.65%) probably hasn't minted any new millionaires since its IPO on Dec. 9, 2021. The Brazilian digital bank went public at $9, but it dropped below $4 a share over the following two years before bouncing back to about $12.
But through all of those wild swings, many major investors stayed bullish on Nu's growth potential. Warren Buffett's Berkshire Hathaway, for example, still holds a 2.2% stake in the company. So could Nu eventually generate millionaire-making gains for its investors who can tune out the near-term noise?
Image source: Getty Images.
A digital-only disruptor
Nu is an online-only bank that served 99.3 million customers across Brazil, Mexico, and Colombia in the first quarter of 2024. That's up from 59.6 million customers two years ago and makes it the fourth-largest financial institution in Latin America.
NYSE: NU
Key Data Points
Nu initially provided simple digital checking and savings accounts, and it subsequently expanded its fintech platform with credit cards, business loans, investment tools, payment services, and insurance policies. Its digital-only approach enabled it to scale up its business at a faster rate than its brick-and-mortar competitors.
In constant currency terms, Nu's revenue soared 168% in 2022 and 63% in 2023. Its customer growth slightly decelerated over the past year, but its growth in monthly average revenue per active customer (ARPAC) is still accelerating.
|
Metric |
Q1 2023 |
Q2 2023 |
Q3 2023 |
Q4 2023 |
Q1 2024 |
|---|---|---|---|---|---|
|
Customer growth (YOY) |
33% |
28% |
27% |
26% |
26% |
|
Monthly ARPAC growth (YOY) |
28% |
19% |
27% |
23% |
30% |
|
Revenue growth (YOY) |
87% |
60% |
53% |
57% |
64% |
Data source: Nu Holdings. YOY = year over year. FX neutral terms.
Nu served 54% of the adult population in Brazil, its largest market by revenue, at the end of the first quarter of 2024. That's up from 46% a year earlier and 33% two years ago. As it locks in more customers, economies of scale are reducing its average cost of serving every active customer while boosting its gross and net interest margins.
|
Metric |
Q1 2023 |
Q2 2023 |
Q3 2023 |
Q4 2023 |
Q1 2024 |
|---|---|---|---|---|---|
|
Gross margin |
40.2% |
41.8% |
42.8% |
48% |
43.2% |
|
Net interest margin |
15.7% |
18.3% |
18.8% |
18.3% |
19.5% |
Data source: Nu Holdings. The percentages are in foreign exchange-neutral terms.
Unlike other fintech companies, Nu isn't sacrificing its gross margins to gain new customers or launch new features. The expansion of its credit card and lending portfolios, along with rising interest rates, are boosting its net interest margins.
Can Nu keep firing on all cylinders?
Nu expects its near-term growth to be driven by Mexico, which is growing faster than its Brazilian market, and its rollout of more financial services. But over the long term, it still needs to deal with tough inflationary headwinds, currency devaluation issues in Brazil, and stiff competition from e-commerce and fintech leaders like MercadoLibre. Elevated interest rates and a strong dollar could also prevent U.S. investors from aggressively buying Nu's U.S.-listed ADR shares.
From 2023 to 2026, analysts expect Nu's revenue to grow at a compound annual growth rate (CAGR) of 33% in USD terms, its operating margin to expand from 19% to 37%, and for its net income to increase at a CAGR of 55%. Those are incredible growth rates for a stock that trades at 30 times forward earnings and 5 times this year's sales.
So is Nu a millionaire-maker stock?
Assuming Nu hits those targets and continues to grow at a more modest CAGR of 20% from 2026 to 2040, it could generate $240 billion in revenue by the final year. If it still trades at 5 times sales, it would be worth a whopping $1.2 trillion -- which would represent a millionaire-making gain of 2,040% from its current market cap of $56 billion.
I don't know if Nu will ever become that big, but I believe it still has plenty of room to grow as income levels and internet penetration rates rise across Latin America. Therefore, it could still be a great time to buy Nu as the bulls look the other way.
