Nu Holdings(NYSE: NU), the largest digital bank in Latin America, will post its third-quarter earnings report after the market closes on Nov. 13. Investors might be reluctant to buy Nu's stock after its 80% year-to-date rally, but I think it's still a terrific growth stock to buy for seven simple reasons.
1. It's gaining a lot of new customers
Nu's total number of customers more than tripled from 33.3 million at the end of 2021 to 104.5 million at the end of the second quarter of 2024. As a digital-only so-called neobank, Nu expanded at a much faster clip than its brick-and-mortar competitors.
Image source: Getty Images.
Nu still has plenty of room to grow. According to the World Bank, at least 70% of Latin America's population is still unbanked. Yet the World Bank also estimates the region's internet penetration rate leapt from 46% in 2013 to 81% in 2023, making it a fertile market for launching digital-only banking services. Nu only operates in Brazil, Mexico, and Colombia today, but it has the momentum to expand into more countries across the region.
2. Its activity rates are rising
As Nu gained more customers, it rolled out more checking, credit card, lending, insurance, investment, cryptocurrency trading, and business-oriented services. It's also tethering more retail partners to its Nu Shopping e-commerce app, which attracted a record 255 million visits in 2023.
As a result, Nu's activity rate (active customers divided by total customers) rose from 76% at the end of 2021 to 83% in the second quarter of 2024. Its monthly average revenue per active customer (ARPAC) surged from $4.50 to $11.20 during the same period.
Nu achieved those growth rates even as its core markets grappled with inflation, high interest rates, and volatile currencies. As those headwinds wane and the regional economy stabilizes, analysts expect Nu's revenue to grow at a robust compound annual growth rate (CAGR) of 35% from 2023 to 2026.
3. Its ecosystem is expanding
Nu continues to launch new services to lock in its customers and widen its moat. It recently launched new generative artificial intelligence (AI) tools to analyze customer data, run financial assistance chatbots, and strengthen its cybersecurity defenses. It also introduced its own cellular service, NuCel, which expands its reach beyond its core financial services and ropes more customers in to its services.
4. Its costs per customer are growing slower than its ARPAC
Nu gained more customers as it expanded its ecosystem, yet its monthly average cost for serving each active customer was unchanged at $0.80 from 2021 to 2023 -- and that metric only rose to $0.90 in the first half of 2024. That stability indicates that economies of scale are kicking in and diluting its operating costs.
5. Its profits are soaring
By keeping costs under control, Nu achieved a positive adjusted profit in 2021. It also turned profitable on a generally accepted accounting principles (GAAP) basis in 2023. Analysts expect its GAAP net income to grow at a CAGR of 56% from 2023 to 2026 as it continues to scale up.
6. Its stock looks cheap relative to its growth potential
At $15, Nu trades at just 25 times forward earnings and 5 times next year's sales. Those valuations look attractive relative to its long-term growth potential. Nu's valuations might be compressed by concerns about Latin America's economy or competition from MercadoLibre(NASDAQ: MELI), which is leveraging its leadership of the e-commerce market to expand its fintech platform, but they could eventually rise as it proves the bears wrong.
7. Warren Buffett didn't sell the stock
Warren Buffett's Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) invested in Nu's initial public offering (IPO) in 2021. That $1.6 billion stake only accounts for 0.6% of Berkshire's equity portfolio, but it hasn't sold any of those shares -- even as it sold its other top holdings like Bank of America and Apple to raise cash during the past year.
It's easy to see why Buffett would stick with Nu: It's growing rapidly, its profits are soaring, it has a wide competitive moat, and it looks fundamentally undervalued. So if you're willing to tune out the near-term noise, it could be a great stock to buy ahead of its next earnings report.
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Bank of America is an advertising partner of Motley Fool Money. Leo Sun has positions in Apple, Berkshire Hathaway, and MercadoLibre. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, and MercadoLibre. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.
