Companies capable of hypergrowth often see their stock prices bid up to outrageous levels. Often, however, shares remain a bargain compared to their long-term potential. Those willing to stomach the high upfront premium can be heavily rewarded if they remain patient.
Even after rising more than 100% since I first pointed out how cheap the shares were, my favorite hypergrowth stock still looks like a bargain compared to its long term potential. Let's take a closer look.
This has been my favorite growth stock all year
Since the year began, I've been writing frequently about Nu Holdings(NYSE: NU). Warren Buffett purchased shares for this holding company when the company went public in 2021, and I noticed he had lost hundreds of millions of dollars on this investment over the years that followed. At the time of Nu's initial public offering (IPO), shares traded at roughly $10. One year after the IPO, they were valued at less than $5.
Buffett isn't often wrong about companies, so I decided to take a closer look. What I found amazed me. Not only was Nu one of the fastest-growing companies I'd looked at in years, but its potential growth trajectory was truly impressive.
Let's back up a bit to review what exactly Nu does. Many readers have never heard of the company before today, and for good reason -- Nu operates exclusively in Brazil, Mexico, and Colombia. So unless you live in one of those countries, or just happened to have come across Nu in your stock investment research, it's likely you know very little about this amazing business.
At its core, Nu is a fintech company. That means it operates in the financial sector, known for its massive addressable markets -- but also that it, in actuality, operates more like a technology company, capable of growth rates most financial businesses would be enviable of.
When the company was founded in 2016, its primary goal was to disrupt Latin America's old-school banking industry. At the time, the financial sector was dominated by a handful of incumbent banks operating out of physical branches. Nu turned the industry upside down by offering its services directly through a smartphone. This approach allowed it to scale rapidly, pushing new financial services to customers at the touch of a button while reducing overhead costs, with part of those savings passed along to its customers.
Nu's growth has been impressive. Over the past decade, it has gone from essentially zero customers to more than 100 million. More than half of all Brazilian adults are now Nu customers. The company's growth runway in Mexico and Colombia is much longer than in Brazil, Nu's first and oldest market. And with more than 650 million residents living across more than a dozen other Latin American countries, Nu's long-term growth is likely just getting started.
Excitement around Nu's explosive growth caused the market to value shares at a steep premium during the IPO. But a marketwide decline in 2022 caused this premium valuation to collapse. After setting an all-time low of just $3.31, shares have been on a massive run, recently topping the $15 mark. Think it's too late to get involved? Keep reading.
Nu Holdings is still my best bet going into 2025 and beyond
As Nu's volatile stock price has proven, it's very difficult to bet on a stock's short-term price movements, even if it's a high-quality fast grower like Nu. Whether or not Nu's stock price beats the market again in 2025, this company remains my best bet for growth investors looking for maximum long-term upside potential.
In the past, Nu was primarily valued based on its sales growth. This approach made a lot of sense given the company remained unprofitable, yet was consistently posting annual sales growth above 100%. Recently, however, the company turned profitable. This tipping point is just getting started, especially with a company like Nu that should experience heavy economies of scale with its tech-first business model.
Over the next five years, analysts expect annual earnings-per-share (EPS) growth to exceed 50% per year. So the current valuation of 50 times earnings -- which otherwise would appear quite expensive -- should come down rapidly as EPS continues to grow. Its forward price-to-earnings multiple, for instance, is just 37.
Like all growth stories, this will take some time to play out. But don't be fooled by Nu's soaring stock price -- there's still time for you to get involved if you're committed to staying patient.
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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.
