Great businesses rarely go on sale. But one fintech stock that I have followed for years just experienced a sudden correction. Give your portfolio an early gift by investing in this quality business before the holidays hit.
Nu Holdings is a growth machine backed by Warren Buffett
I've been a big fan of Nu Holdings (NU -0.29%) since its initial public offering in 2021. And I'm not alone in my fandom. The company is backed by Sequoia Partners, one of the best venture capital firms of all time.
Even Warren Buffett has picked up more than $1 billion in shares, a stake that he has refused to trim even as the stock price skyrocketed by more than 200% since mid-2022.
What do I love most about Nu? It has developed a proven recipe for growth that should be sustained for years, if not decades to come.
More than a decade ago, Nu's founders realized that Latin America's banking industry was primed for new competition. At the time, the banking industry was largely consolidated, with minimal innovation despite the advent of new technologies like the internet and smartphones.
What the company decided to do was a novel break from tradition, at least for a Latin American financial services business. Instead of opening a bunch of physical branches, Nu went directly to consumers through a smartphone app. While this was fairly common at the time in more developed markets, the strategy was wholly unique in Latin America.
By offering its services directly through a smartphone, Nu was able to lower costs for most conventional financial services like debit and credit cards, banking and checking accounts, and basic investment accounts. This reduction in fees, plus ease of access, allowed it to grow quickly.
But there was another major advantage to this strategy: Nu could innovate far more nimbly than the competition. At the push of a button, it could activate a new product or service for millions of customers.
Clearly these factors were in demand by Latin American residents. The company went from zero customers to nearly 100 million in its first decade of operation. And with more than 650 million residents across the entirety of Latin America, the company has plenty of room for long-term growth.
The discount on this fintech stock may not last long
Nu has become a growth machine, and its stock price has risen consistently due to that reality. But even growth superstars like this temporarily go on sale.
Over the last few weeks, shares have fallen in value by nearly 25%. What was the cause? In mid-November, the company reported blockbuster earnings. But sales growth was below historical norms, while certainly profitability metrics compressed.
Then this week, an analyst from Citigroup cut his rating on Nu stock to a sell from neutral with a price target of $11, down from $14.60. While the analyst noted Nu's "impressive capacity" to grow, he thought that the latest run-up was an opportunity to take profits.
There's no doubt that shares were expensive in mid-November when they set all-time highs. Nu was trading at more than 10 times sales, and more than 40 times profits. That's a steep price to pay for a bank stock.
But this isn't any ordinary bank stock -- this a fintech business, capable of growing rapidly with impressive economies of scale. For example, the company just turned profitable in 2023, and already its shares trade at just 33 times earnings after the correction. On a forward basis, shares trade at less than 28 times expected earnings.
NU PS ratio, data by YCharts. PS = price to sales; PE = price to earnings..
Did Nu's valuation get a little out of hand last month? Perhaps. But this is a business built for the next century, not just the next few years, as Warren Buffett's involvement highlights. Getting a small discount on a fantastic business that can grow for the rest of your life is an opportunity too good to pass up.
Analysts are often concerned with short-term price movements. But long-term investors should use these short-term movements to their advantage.
Nu' Holdings' recent quarter wasn't up to its usual standard, but everything is still headed in the right direction from a macro perspective. While the latest correction may have been warranted on a short-term basis, don't expect the discount to last through the holidays -- this is too good a bargain to pass up for patient investors.
