Nu Holdings: A Long Term Growth Story (NYSE:NU)

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Thesis

Investing in neo-bank Nu Holdings Ltd. (NYSE:NU) provides an thrilling long-term alternative characterised by important uneven upside. The potential stems from Nu’s uniquely disciplined development technique which has enabled them to attain a uncommon feat – sustaining speedy development whereas attaining GAAP profitability. In the latest quarter, Nu grew its buyer base by 28% to 85 million whereas rising income by 60%. Regardless of these sturdy developments the inventory remains to be properly beneath its IPO value of $9. The present share value of $7.36 represents a 22% decline because the IPO. For causes I’ll lay out beneath, I see the worth almost doubling over the subsequent two years.

Not A Conventional Financial institution

Again in 2012, Sequoia Capital despatched David Osorno to Latin America in the hunt for high-potential ventures. Throughout his exploration of the area, he uncovered a urgent want for user-friendly digital banking options. This want arose from a good portion of the inhabitants missing entry to banking companies, which was additional exacerbated by the inefficiencies in current banks. Following his go to, he left Sequoia and based Nubank.

Nubank initially ventured into the monetary panorama with the launch of a bank card however quickly broadened its horizons to embody a complete array of companies, spanning insurance coverage, loans, and investments. The corporate in the end went public in December of 2021 at a $45 billion market capitalization at a time when fintech noticed sky-high valuations. Since then, Nubank valuation has corrected, however its story has remained sturdy.

Golden Ticket Of ARPAC Growth And Buyer Development

Nu Holdings has persistently grown its common income per lively buyer (ARPAC). This yr, ARPAC surged 18% and Nu’s lively buyer base grew by 32% resulting in 60% FXN income development. That is significantly noteworthy as SoFi (SOFI), a significant competitor, has seen declining ARPAC since Q3 2022.

The ARPAC development comes as Nu continues to develop its merchandise per lively buyer and improve the proportion of shoppers utilizing Nu as their major checking account. These developments ought to proceed as Nu doubles down on its growth efforts in Colombia and Mexico and provides new merchandise for its current clients, akin to Nu Cuenta, insurance coverage, and investing merchandise.

Moreover, Nu senior administration has bold plans for the app as a complete. Within the Q2 2023 convention name, the CEO articulated his grand plans, saying, “After which past, as we execute {the marketplace} technique, we’ve got already built-in over 150 completely different commerce companions into our app. Persons are with the ability to make reservations in our app. Folks have been capable of store in our app. We see the chance of us being greater than a monetary companies agency.” Whereas this can be a lofty aim, it aligns with Nu’s narrative of ARPAC development alongside buyer growth.

NIM Growth

Nu has expanded its internet curiosity margin (NIM) by a exceptional 860 BPS in simply the previous yr. In distinction to Nu, SoFi has maintained a extra constant NIM despite the fact that it caters to a extra prosperous buyer base. This substantial NIM development at Nu serves as compelling proof of their sturdy and efficient enterprise mannequin. Furthermore, given Nu’s bigger measurement in comparison with SoFi, there may be restricted justification for SoFi’s NIM growth to already exhibit indicators of stagnation. Moreover, NIM growth is extraordinarily essential for rising the topline as NII represented 56% of Nu’s income in the latest quarter.

Value Self-discipline

Usually a younger high-growth tech firm relentlessly dilutes shareholders, however Nu has bucked this development, demonstrating commendable value self-discipline in current quarters. They lowered headcount and stock-based compensation even because the enterprise has expanded. This has enormously slowed the dilution spiral they as soon as skilled. In late 2021, stock-based comp accounted for nearly 15% of income, however since then it has steadily declined and now accounts for lower than 4% of income. Even the CEO determined to forgo stock-based comp in 2022 and 2023. Whereas dilution remains to be a danger to traders, the current developments provide promising indicators that Nu will not be solely slowing the dilution development however doubtlessly transferring towards accretion.

Giant Moat In A Quickly Increasing Trade

Nu dominates the Latin American neo-banking trade which is rising at a 5%+ CAGR. Neo-banking, a discipline inherently reliant on person belief, seems poised to persistently reward its prime gamers. In gentle of this, I understand Nu as possessing a considerable enterprise moat, a pivotal think about funding choices and one in all Warren Buffett’s most important concerns in evaluating companies. The sturdy moat positions Nu favorably for future market dominance, significantly as smaller neo-banks face important challenges in establishing a status that may rival Nu’s. The belief Nu has garnered inside the trade ought to show invaluable in sustaining and increasing its market share within the years to come back.

Financials

Nu has showcased super monetary self-discipline in current quarters. In Brazil, their Basel Index stands at 20.2%, properly above the requisite 10.5%. Furthermore, they keep a considerable reserve of two.4 billion in extra money. Their liquidity place stays sturdy, with a loan-to-deposit ratio (LDR) of 35%. Notably, Nu has persistently lowered its operational bills, efficiently decreasing its effectivity ratio to a commendable 35.4% over six consecutive quarters. This amalgamation of strengths solidifies Nu’s place as one of many extra environment friendly establishments inside the banking trade.

Dangers

With corporations primarily based in growing international locations, the principle dangers are often tied to the macroeconomic surroundings akin to main recessions, corruption, or hyperinflation. Consequently, Brazilian corporations often commerce at cheaper valuations to the US inventory market. Nevertheless, Nu trades at a premium. Moreover, Nu has witnessed an rising charge of non-performing loans, with 90+ NPLs rising from 5.5% to five.9% in the latest quarter, though nonetheless fairly low. If financial circumstances worsen, this charge may spike. Additionally it is price noting that Nu could encounter little development potential in Brazil because it already has saturated a lot of the market as half of the grownup inhabitants has downloaded the app. Nu’s counter can be that they nonetheless have an extended option to go in monetizing the Brazilian buyer by cross-selling and upselling, however Nu wants to offer proof to help this development thesis going ahead.

Valuation

Nu at present trades at a ahead P/E ratio of 45, which is sort of the premium. Nevertheless, it is important to acknowledge that relying solely on the P/E ratio is a restricted measure when assessing an organization’s intrinsic worth. Among the most profitable investments in historical past have persistently commanded a big premium over the market. In my opinion, the Worth/Earnings-to-growth (PEG) ratio generally is a higher valuation methodology because it additionally considers development charges. As a result of Nu is rising so rapidly, its PEG stands at a compelling .77, signifying a notable low cost to the S&P 500. The image will get even higher subsequent yr when its ahead P/E and PEG ought to compress to 27.33 and .5 respectively. In different phrases, Nu ought to rapidly develop into its giant P/E.

When evaluating potential investments, calculating honest worth is a helpful however imperfect train. When it comes to assessing the honest worth of a quickly rising firm like Nu, I want utilizing a PEG ratio of 1, as an organization ought to commerce at a a number of consistent with its development charge. Dividing Nu’s present share value of $7.36 by the .77 PEG results in a good worth of $9.56, representing 30% upside.

It’s tough to check Nu to its friends since most Neo-banks are personal and the general public ones should not but worthwhile. SoFi, for instance, remains to be unprofitable despite the fact that it was based earlier than Nu. Whereas EV/Gross sales comparisons could be made, these fall brief as a complete methodology for evaluating corporations, as they neglect the essential side of value administration inside any enterprise.

Bull – Bear – Base

My base case value goal for September 2025 is $14.1 primarily based on a Searching for Alpha consensus 2026 EPS estimate of .47 and a ahead PE of 30. This case would result in a 38% two-year IRR. I see Nu as a premium inventory that deserves a premium PE as a result of its speedy development.

The bear and bull instances symbolize 69% and -4% IRRs. It is price noting that the -4% IRR, although unfavorable, seems extremely inconceivable. This stems from the truth that an EPS of .27 in 2026 would entail no EPS development from 2024-2026, which seems unreasonable for a corporation with such sturdy development and price self-discipline. Whereas this state of affairs is inside the realm of chance, investing inherently carries dangers. Nevertheless, at its core, investing includes figuring out alternatives with favorable risk-reward profiles the place the potential upside outweighs the related dangers. Nu is a type of uncommon instances the place the anticipated worth is sort of optimistic regardless of the danger, making me passionate about taking this guess.

Technicals

Whereas I’m a basic investor at coronary heart, my philosophy is that combining the 2 could be deadly. With that in thoughts, let’s analyze Nu’s technicals.

Trying on the chart, a very powerful ranges are at present the $7 help stage and $8.24 stage. A double prime occurred on the $8.24 stage following Q2 earnings, doubtlessly prompting many traders to promote their stake. In my opinion, the outcomes had been fairly sturdy, and the pullback presents an attractive shopping for alternative because the core development story stays intact.

The following main impediment within the chart will probably be crossing the $8.24 resistance stage, and up to date constructing momentum suggests this may very well be on the horizon. The transferring common convergence divergence (MACD) simply turned optimistic as a result of sturdy current value momentum. Whereas the worth of the relative power index (RSI) at 51.58 doesn’t carry nice significance, its trendline lately inflected up, including to the optimistic outlook. General, I see the worth patterns as optimistic, and if it might clear the long-term resistance, the subsequent hurdle looms round $9.30.

Abstract

Once more, I see uneven upside forward for Nu stemming from its uniquely disciplined development technique, sturdy market place, stable monetary place, and cheap valuation. In my opinion, shopping for the inventory for the long run is the perfect plan of action because the length will give the market time to really comprehend Nu’s exceptional story.