How long can an excellent company keep up unstoppable growth rates? That's a question Nu Holdings' (NYSE: NU) investors and followers have been asking for some time. It has reliably grown its business by triple- and high-double-digit rates since it went public in 2021, and it's been highly profitable for more than two years now. But the market was a bit disappointed in its earnings report last week, and the stock dropped about 10% after the report.
Investors shouldn't be too worried; Nu stock is still up 79% over the past year, which means the market is still fairly confident about what's going on. Let's check out what happened in the third quarter, why investors switched paths, and why this is still an opportunity you don't want to miss.
Still growing by leaps and bounds
By most measures, the third quarter was pretty terrific. Revenue for the Brazilian online bank increased 56% year over year (currency neutral) to $2.9 billion, and net income doubled to $553 million. Those are the basics.
Looking deeper, it's still adding customers rapidly, and they're engaging at even stronger levels. Nu added 5.2 million new customers to its platform in the third quarter for a total of 109.7 million, a 23% increase year over year. It added 1.1 million customers monthly in Brazil, reaching 98.8 million by the end of the quarter, and it has since then surpassed 100 million in Brazil alone.
The faster growth is happening in the newer markets, where Nu is still just starting out. It added 1.2 million customers in Mexico to reach 8.9 million, and it surpassed 2 million in Colombia.
There's another layer to most of Nu's reporting because it operates in Latin America but reports in U.S. dollars. Average revenue per active user is one of Nu's baseline metrics, and it remained steady at $11 in the quarter. Currency neutral, though, it increased 25% year over year. Management stressed that it has already reached $25 for more mature customers, indicating that customers who stay on the platform buy more and higher-priced products. The activity rate reached 84% in the third quarter.
Since Nu is all digital and always has been, it has a built-in tech edge over legacy banks in agility and lower costs. This is even more pronounced because of its region, which has historically been served by a small number of large, exclusive, and highly regulated banks. Nu's cost to service was $0.80 in the third quarter.
The credit business was strong as well. The total lending portfolio increased 47% over last year to $20.9 billion, and loan originations increased 79%. Deposits increased 60%, and net interest income was up 63%.
What's spooking the market
Nu has mostly avoided the macroeconomic pressure plaguing Brazil. But new interest rate hikes there, where inflation is still rampant, paint a more challenging outlook. That's combined with Nu's slowing growth. Even though it's not exactly slow, and it beat expectations in the third quarter, it's still a deceleration across several metrics.
At the current growth rates and with updated expectations, Nu's near-term outlook is changing. That's what's causing the price to come down, but not too much; it's mostly a resetting of short-term expectations and valuation. Nu stock has been trading at a reasonable price. But if growth is slowing down, the valuation could become unreasonable quickly if the stock price keeps climbing.
Why it's still a strong buy
With strong performance but a lower price, Nu stock looks like an even better opportunity right now. It's trading at a forward P/E ratio of 23, which is a bargain for a high-growth stock. And current rates are still high growth. Wall Street analysts expects revenue to increase about 43% in 2024. It also expects EPS to almost double this year and then increase by about 50% next year.
Nu is reporting phenomenal performance despite external headwinds, and it has a massive growth runway. Don't let the short-term factors drive you away. If you have a long-term horizon, Nu is an excellent stock to buy right now.
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Jennifer Saibil has positions in Nu Holdings. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.
