Nu Holdings (NU -1.71%) continues to wow investors with its incredible growth. The Brazil-based digital banking platform is adding customers at a fast pace, generating high revenue, and it has become firmly profitable. Nu stock gained 104% last year, and it's already up 46% in 2024.
That is, no doubt, happy news for shareholders -- among them Warren Buffett-led Berkshire Hathaway, which holds the stock in its equity portfolio. So where could the shares be a year from now? And should investors consider buying today?
More customers
Nu has been adding customers at a rapid pace. That's not surprising since it provides an all-digital, easy-to-use financial services platform. In its home country of Brazil, the banking market has historically been dominated by five large banks. Nu targets the lower-income population, who may not need all the bells and whistles of a large bank, with low fees and high savings rates.
But as it soars in popularity among the masses, it's been going after the high-income population as well. As of the end of the 2024 first quarter, it counts 54% of the adult population of Brazil as customers. It added 5.5 million new customers in the quarter in all of its markets, including Mexico and Brazil.
It launched a high-yield savings account in Mexico last year, and customer count in Mexico increased 106% year over year in the first quarter, and it recently launched a similar account in Colombia.
Nu ended the first quarter with 99.3 million customers, an increase of more than 20 million from the year before. Expect that number to be a lot higher in a year from now, with contributions from all of its markets.
More sales
Nu's strategy is to attract customers with its low fees and high rates and cross-sell new products. It makes money from both new accounts and more product adoptions, and one of its main top-line metrics is average revenue per active user (ARPAC).
Both revenue and ARPAC are growing at high rates. Revenue increased 64% year over year (currency neutral) in the first quarter, and ARPAC increased from $8.60 to $11.40. These trends, with more customers and higher product adoption leading to strong double-digit revenue growth, are likely to continue at steady rates through next year.
More profits
Nu operates an asset-light model as an all-digital app with no physical branches. Its strategy of upselling products is leading to higher revenue without higher customer acquisition costs, and the cost to serve has remained fairly steady at $0.90.
It also operates a robust credit business with increasing net interest income, which adds to total net income.
Image source: Nu Holdings.
The Mexican and Colombian markets, however, are both still unprofitable. For the time being, management sees it in Nu's interest to operate in these markets unprofitably to gain a foothold, generate interest, and establish its brand. Brazil, its more mature market, is profitable enough to keep the business profitable as a whole while it gets into these markets.
Net income should keep increasing through next year, but it's unclear how long Mexico and Colombia will remain unprofitable. Management sees the same trajectory as for these countries that Brazil went through, eventually achieving profitability at scale. However, it still considers them to be in an investment stage, and profitability may be a ways off.
More stock gains
Nu stock remains at a reasonable price for what it offers, and it could be undervalued. It trades at a forward price-to-earnings ratio of 18, suggesting that there's plenty of room for it to keep climbing without becoming overvalued.
It's not without risk. If it doesn't become profitable soon in Mexico and Colombia, that could impact overall profitability. It's facing tough competition in some markets, and it's still building its business with new markets in Brazil. In a year from now, though, it should be bigger and more profitable, and the stock price should reflect that trend.
