Few stocks are as misunderstood as Nu Holdings (NU -2.29%). The digital bank, which focuses on Latin America, is poised to generate substantial profits in the years to come, but it keeps being downgraded by Wall Street due to misinterpretations of its lending business.
Shares are now down 37% from their highs, while revenue grew 42% year over year last quarter. Here's why I'm buying more shares of Nu Holdings after this recent dip.
Increasing loyalty in Brazil
As of last quarter, the company had 135 million customers, most of them in Brazil. Over half of adults in the country have an account with the digital bank, which aims to bring modern banking tools to those whom legacy banks previously disregarded, keeping them out of the financial system.
At the same time, Nu's revenue from existing customers in Brazil is lower than that of the average bank. Management intends to change this by increasing product penetration through services like instant payments, lending, investing, and credit cards.
NYSE: NU
Key Data Points
For example, management just launched a premium credit card for wealthier customers called Nubank Ultravioleta, using a model similar to American Express' by adding services around credit card spending. This and other initiatives are why average monthly revenue per customer just hit a record of $15.90, growing 23% year over year.
Investors are pessimistic about the digital bank's increase in nonperforming loans (NPLs) that are 15 to 90 days past due, which rose to 5% last quarter. However, this is a seasonality issue in Brazil and was only up from 4.8% in the same period a year ago. While you don't want to minimize this figure, it is the price of doing business with lower-income earners, which is factored into the interest rate charged on loans.
Net income was up 41% year over year last quarter to $871 million.
Image source: Nu Holdings.
Hitting its stride in Mexico
The company's expansion into Mexico is driving strong growth. It recently hit 15 million active customers in the country and is closing in on $1 billion in annual revenue, having launched its business in 2021. Mexico is much further behind Brazil in digital payments and credit card adoption, giving Nu Holdings the same runway it had in Brazil a decade ago.
Market share in Mexico is still minuscule, but it is seeing huge customer adoption and steady growth in monthly revenue per customer. As these work in tandem, revenue in Mexico should continue to grow rapidly. Plus, its business just turned profitable in the country, which will turn it from a drag on net income over the last few years to a benefit over the next few.
NU Net Income (TTM) data by YCharts; TTM = trailing 12 months.
Returning capital to shareholders
Over the past 12 months, Nu Holdings' net income was $3.2 billion. I expect further growth from the steady increase in revenue per customer in Brazil and the growth inflection underway in Mexico. The cherry on top is the company's rapid growth in Colombia and its planned expansion into the U.S. once it obtains a banking license here.
This should help net income climb to $5 billion and even above $10 billion in the years ahead, especially once you factor in the operating leverage inherent in a scaled-up national bank with no overhead costs from physical branches.
After its drawdown, Nu stock now trades at a market cap of $57 billion. To take advantage of this lower price, management is repurchasing stock in a new $1 billion program, which will help to reduce shares outstanding and grow earnings per share . A market cap of $57 billion is cheap for a business poised to eventually generate $10 billion or more in annual net income; you just need a time horizon longer than a year. That's why I am buying more shares of Nu Holdings stock.
