Wall Street experts aren't too keen on fintech operator Nu Holdings(NYSE: NU) right now. The average price target for the shares is about $15.30, which is actually a few cents lower than its current price, suggesting that Wall Street believes there's little-to-no upside for the stock right now.
But this picture doesn't tell the whole story. In fact, Nu as a company has a very bright future. And patient shareholders, which by the way includes Warren Buffett's Berkshire Hathaway, could score big with this little-known growth stock.
Ignore the experts -- this stock is a buy
It's important to note that Wall Street price targets are typically predictions for where the stock price will end up in the next 12 months. So for investors looking beyond a one-year window, these price targets aren't the most helpful indicator for a company's long-term promise. Additionally, Wall Street's price target for Nu appears unattractive right now not due to weakness in the company's performance but rather its strength. Since the year began, Nu's stock price has soared by more than 90%. Price targets established earlier in the year may already be outdated, failing to incorporate more recent good news that has propelled the stock price higher.
The question to ask today isn't whether Nu has upside potential compared to Wall Street price targets but rather how much long-term upside do Nu shares have today. Despite the recent run-up, it's not hard to chart a future where Nu continues to grow by leaps and bounds, creating hefty profits for patient investors.
Let's start at the beginning with what makes Nu so special. Few American investors have dealt with the company because it operates as a digital-only bank exclusively in a handful of Latin American countries. But those residing in the countries that Nu operates in -- Brazil, Mexico, and Colombia -- very likely have heard of the company. That's because Nu took the Latin American financial-services market by storm when it launched roughly a decade ago, offering bank accounts, credit and debit cards, and even insurance and crypto trading directly through its smartphone app. At the time, the competition was largely leaning on physical branches, which limited customer touch points, added unnecessary costs, and reduced overall innovation.
In the decade since launching, Nu has gone from essentially zero customers to more than 100 million. Its ability to make enormous inroads in market dominated by slow-moving legacy lenders cannot be overstated. More than half of all Brazilian adults, for example, are now Nu customers. When analysts crunch the numbers, it's apparent that Nu should have a long runway for additional growth. More than 650 million people live in Latin America. And while the demographics and economics in other countries won't be as attractive as Nu's initial markets, Nu will be building off a strong foundation. It's clear now that its products are in high demand. Plus, it can reach customers quickly in ways that build increasing loyalty over time, especially given its ability to push new services to customers at the press of a button -- an advantage the competition is still trying to match.
Nu shares still have more upside for this reason
Now armed with a $75 billion market cap, Nu is far from done growing. In fact, the company recently reached profitability -- a key milestone that should fuel the stock's rise for years to come. Right now, the shares trade at a lofty 50 times earnings. But analysts expect earnings to increase by an astounding 54% annually during the next five years. That's due to widening profit margins and rising earnings per share (EPS), both of which are buoyed by a revenue base still growing in double-digit percentages.
NU PE Ratio data by YCharts.
On a forward basis -- that is, based on what analysts expect the company to earn next year -- Nu shares trade at just 36 times 2025 earnings. If Nu is able to maintain double-digit growth rates during the next five years, the current-share price will likely turn out to be a steal. But there's a catch: These gains will be mainly experienced by patient shareholders willing to see these potential-growth rates translate into concrete financial results.
Right now, Nu shares look expensive, and Wall Street's forecasts back up that appearance. But make no mistake: There's still plenty of profit to be made for those willing to buy and hold this promising-growth stock.
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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.
