The U.S. is one of the world's wealthiest countries, but emerging markets could offer the best investment opportunities during the coming decades. Regions like Latin America are highly populated but less economically developed. That could change in the future, and some companies doing business there are bound to generate exceptional investment returns.
Nu Holdings(NYSE: NU) is a digital bank in Latin America that stands out for its blazing growth and enormous opportunities.
Better yet, the stock is a bargain. Shares cost just $15 today, meaning Nu is a stock that can fit into almost any investor's budget. Here is why it's the smartest growth stock you can spend that money on right now.
A power player in Latin America's banking sector
Latin America is a large region stretching from Mexico to the southern tip of South America. It also includes the Caribbean. This group of 20 countries is home to about 656 million people, many of whom lack access to modern luxuries that those in developed nations enjoy, especially in terms of technology. An estimated 70% of the population is either unbanked (with no banking access) or underbanked (with a bank account but no credit access).
Nu Holdings is one of the largest financial institutions in Latin America. The company provides financial services for over 100 million people across Brazil, Mexico, and Colombia.
The company has enjoyed rapid expansion; its customer base was only 24 million in 2020, so it has more than quadrupled in just over four years. About 56% of Brazil's adult population banks with Nu.
Importantly, Nu has plenty of momentum; its customer count grew nearly 25% year over year in Q2. There are more than 390 million people in these three countries, so even without new markets, there is still significant expansion potential if Nu can replicate its success in Brazil.
Electric earnings growth
The great thing about banking is that there are many growth levers to pull. In reality, Nu can grow in three ways:
- It can gain more customers.
- Its customers can use more products and services.
- Its customers can deposit and borrow more as their income rises.
Nu offers banking services, credit cards, loans, investing tools, insurance, and more. The average active customer uses about four products. Considering Nu's customer base alone is growing at a 25% rate, it shouldn't surprise that overall revenue growth is also robust:
NU Operating Revenue (Quarterly YoY Growth) data by YCharts
Nu is also reaching the point where business expenses don't increase as fast as revenue. This turns the business profitable, and since earnings started small, they are rapidly growing. Nu's non-GAAP (adjusted and not in accord with generally accepted accounting principles) income was $487.3 million in Q2, a 135% increase over last year. Naturally, the growth rate will slow as the numbers get bigger, but it's clear that the company is poised to maintain strong earnings growth for at least as long as customer growth remains in the double-digit percentages.
An attractive price for a great company
The market is near all-time highs, which can make finding a bargain harder. Nu Holdings stock rose 70% during the past year. Yet, it seems there is still plenty of room to run. The stock trades at a forward P/E ratio of 24, while analysts estimate the company's earnings per share will grow by an average of 53% during the next three to five years.
Remember, a high or low P/E ratio alone doesn't tell you whether the stock is a good buy, so you can use the PEG ratio to compare the stock's valuation to the underlying company's growth. Today, Nu's PEG ratio is only 0.65 (lower is better). That implies Nu is still a fantastic deal because its anticipated earnings growth is so high.
Of course, the company still has to meet those estimates, but it should be able to do that if substantial customer acquisition and revenue growth continue. Such a compelling valuation leaves a margin of safety for investors, even if Nu's long-term growth falls a little short of analysts' estimates.
Nu is a rising star in the financial space, and its stock is among the most compelling opportunities on the market today.
Should you invest $1,000 in Nu Holdings right now?
Before you buy stock in Nu Holdings, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Nu Holdings wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $857,383!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of November 4, 2024
Justin Pope has no position in any of the stocks mentioned. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.
