The largest neobank in the Western world is a company you've likely never heard of. Nu Holdings (NU -0.29%) is the parent company of Nu Bank, a digital bank taking Latin America by storm. Starting in Brazil, the bank and financial services platform has disrupted the stodgy legacy institutions and is now closing in on 100 million active customers.
This growth stock could be an exciting fintech play on the growth of the Latin American market. Where will Nu Holdings stock land in 10 years?
Making banking easier in Brazil and beyond
Bad banking services can frustrate customers. Unclear rules, high fees, and long lines are all too common across Latin American markets. Nu Bank's founders found this out firsthand when beginning to work in Brazil. It was then -- back in 2013 -- that the idea for this business was formed. Using the smartphone, the company would simplify banking, spending, and financial services in a market that didn't treat customers well. Sure enough, the idea worked.
Today, Nu Bank has 100 million total customers and 92 million that interact with its platform each month. It offers personal banking, credit and debit cards, and a growing list of other personal finance products. In fact, management now estimates over half of the adult population in Brazil now uses a Nu Bank product.
While customer growth in Brazil will slow, Nu Holdings isn't resting on its laurels. It has expanded to the Mexican and Colombian markets, with 8.9 million and 2 million customers in these respective markets. It has only launched in these three markets, but there are plenty of other countries across Central and South America that it can eventually enter. Argentina is recovering from a hyperinflationary period and has a population of just under 50 million people, as one example.
Betting on economic growth in Latin America
As a bank and credit card platform, Nu Bank earns more when people spend more, save more, and borrow more through its platform. It really is that simple.
All three grow in correlation with economic growth. Nu Holdings has won over a lot of customers in these Latin American markets. But investors need to ask: Should we be bullish on these Latin American economies and the growing wealth of these customers?
I think it is reasonable to be optimistic. Mexico's gross domestic product (GDP) has grown like gangbusters in recent years and should benefit from more reshoring investments from the United States. Brazil's GDP has recovered after years of malaise. Argentina's new president has helped solve hyperinflation and is much more pro-business. Most of these Latin American countries have strong population pyramids, with a higher percentage of the population as young adults that will grow into their prime spending years during the next decade. These are much better demographic pyramids economically speaking compared to places like Europe or East Asia.
The story will be much more complicated than this, of course. Some countries will do better than others. But overall, Latin America should be much wealthier in 10 years than today, which will benefit Nu Holdings.
NU Net Income (TTM) data by YCharts
Where will the stock be in 10 years?
Nu Holdings has gone from less than 1 million active customers to close to 100 million in less than 10 years. A decade from now, I think it can reach 200 million active customers as long as it starts expanding into new Latin American countries. Population projections have the region hitting about 700 million people in 2030. Total households will be lower than this, but there is still plenty of room for Nu Bank to grow in the coming years.
With general economic growth, I expect Nu Bank's spending per active customer to at least double over the next decade as well. In fact, monthly spending per active customer is already surging, more than doubling from December 2021 through December 2023. In 10 years, it is reasonable to expect Nu Bank to at least double this figure, if not more.
Which brings us to financial estimates. If customers and spend per customer can double, its revenue will grow fourfold during the next 10 years. Add in some operating leverage and economies of scale and I think its underlying earnings power can grow fivefold.
During the past 12 months, Nu Holdings had $1.78 billion in net income. Multiply that figure by five and you get $8.9 billion in net income in 10 years. Apply a reasonable price-to-earnings ratio (P/E) of 20 and you get a market cap of $178 billion, or around triple its current market cap.
This means Nu Holdings stock could be up threefold over the next 10 years -- if not more -- as long as its earnings can keep growing at a fast rate. Given its impressive track record and consumer experience, I think it can. Nu Holdings stock looks like a buy today for investors focused on the long term.
