Nu Holdings (NU -0.29%) has established a dominant presence in the Brazilian banking market and is making strides in expanding across Latin America.
However, its journey hasn't been without its challenges, and the stock has displayed considerable volatility as Nu navigates the complexities of rapid growth in developing markets. The stock price has surged by 44% so far in 2024, but investors may wonder if that run is likely to continue or if it's time to take profits. Should investors buy, sell, or hold Nu stock right now?
Nu's explosive growth
For years, Brazilian consumers faced a highly concentrated financial system as five dominant banks controlled 80% of the country's financial assets. In fact, former Finance Minister Paulo Guedes referred to Brazil's banks as a "cartel" due to the exorbitant fees they charged, with credit card interest rates as high as 160%.
However, regulatory changes in the country paved the way for upstarts like Nu, which had its initial public offering in 2021. The digital-only bank, Nubank, launched in 2013 and has disrupted the traditional banking model by offering free digital accounts and credit cards without annual fees, attracting tens of millions of customers. In the process, it has helped reduce Brazil's unbanked population from 16.3 million to just 4.6 million.
In recent years, Nubank's popularity has increased exponentially with its customer base going from 24 million in 2020 to over 98.8 million currently (that's more than 56% of Brazil's adult population). More than just attracting new people to its offerings, Nubank has done a good job maximizing value from its existing customers. In the third quarter, its average revenue per active customer increased 10% year over year.
Expanding into new markets across Latin America
Nu's earnings continue to grow and the company has now posted seven consecutive quarters of growing net income. The fintech earned $553 million in profit in the third quarter, up 82% from a year earlier and up 13.5% from the previous quarter.
NU Revenue (Quarterly) data by YCharts.
Nu's growth in Brazil is undeniable, and the company has its sights set on the rest of Latin America. Its current focus is on expanding into Mexico and Colombia, two of the largest markets in Latin America.
In the third quarter, Nu's customer base in Columbia grew by 150% year over year to 2 million, and in Mexico, it grew by 106% to 8.9 million. A recent note from Susquehanna Financial Group pointed out that 51% of Mexico's population remains unbanked, equating to around 66 million people. That offers a huge opportunity to Nu.
What's next for Nu?
Beyond its geographic growth plans, Nu Holdings also aims to expand in other new verticals. Services it has launched in recent years include NuPay, NuTravel, and NuMarketplace. In the past few months, it has launched NuCel, a mobile phone service, in a bid to diversify away from financial services.
By creating a wider digital ecosystem that provides it with more cross-selling opportunities, Nu Holdings is leveraging its already-large customer base. "I do think that the opportunity to go beyond financial services once you start adding a number of different verticals is pretty substantial," CEO David Vélez noted.
Ultimately, Nu aims to reduce the cyclicality of its revenue streams and lessen its reliance on credit for sustained growth.
Buy, sell, or hold Nu?
One knock on Nu lately has been its pricey valuation. Earlier this year, the financial services company traded at around 57 times its earnings. However, its net income growth has boosted earnings. The stock price has fallen by 25% from its recent peak of $16 per share. Now, it's priced around 32 times trailing earnings and 19 times next year's projected earnings.
Investors will want to keep an eye on Nu's loan growth and loan portfolio. In the third quarter, the percentage of nonperforming loans 90 days or more delinquent on its books ticked up to 7.2%, up from 6.1% one year ago. While this rise was within management's expectations, further upticks could ultimately impact the company's bottom line.
That said, Nu continues to grow at an impressive rate, and the potential for continued expansion in previously underserved markets makes it appealing. Its rapid growth and higher valuation make the stock vulnerable to further volatility, so it may not be a suitable holding for more conservative investors. However, after its recent sell-off, I think Nu is a good growth stock that long-term investors should feel comfortable scooping up today.
