wealth inequality

Nu Holdings: A Fintech Stock W

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Among the 13 companies that went public in the U.S. in the fourth quarter of 2021, Brazilian fintech Nu Holdings Ltd. (NU, Financial) had the second-highest number of guru buys, behind only electric vehicle maker Rivian Automotive Inc. (RIVN, Financial).

The fourth-quarter 13F reports reveal that a total of seven of the Premium gurus followed by GuruFocus owned shares of Nu Holdings as of the quarter’s end:
Warren Buffett
(Trades, Portfolio),
Catherine Wood
(Trades, Portfolio),
Chase Coleman
(Trades, Portfolio),
Baillie Gifford
(Trades, Portfolio),
Frank Sands
(Trades, Portfolio),
Paul Tudor Jones
(Trades, Portfolio) and
Steven Cohen
(Trades, Portfolio).

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What’s interesting is that these gurus are known to follow a variety of different investing strategies. Buffett and his portfolio managers follow more of a value-based strategy, for example, while Wood’s Ark Invest aims for disruptive growth and Coleman invests mostly in tech stocks.

Just what is it about Nu Holdings that drew the attention of several famous investing gurus with very different investing strategies? Let’s take a look.

Reinventing financial services

The growth story of Nu Holdings, which operates under the Nubank name, centers around reinventing financial services, both in terms of transforming financial services for the digital age and in terms of making them accessible for as many people as possible.

Nu CEO David Velez summarized the company’s goals as follows in the fourth-quarter 2021 earnings release:

“Nu’s stock exchange listings as well as our NuSocios program also opened the door for millions of Brazilians to be included in the capital markets. Maintaining our long-term orientation and always putting customers first, we are now accelerating efforts to build out Nu’s powerful ecosystem, enhance our leading digital banking platform and accelerate expansion into our new geographic markets to improve financial access for many others.”

The company’s focus on accessibility and digitization are just a couple of the reasons why it has grown so quickly, even through two recessions, a presidential impeachment and the Covid-19 pandemic. Another reason is because the growth opportunity in the underbanked Brazilian market was (and still is) huge.

Scale advantage

The sheer size of the Brazilian market opportunity (Brazil is the ninth-largest economy in the world with gross domestic product of $1.87 billion according to data from World Population Review), coupled with systemic problems in the country’s traditional banking system that resulted in underbanking, gave Nubank the ability to rapidly scale up.

Through Brazil’s traditional banking system, much of its 200 billion population either didn’t have access to the financial tools they needed, or they were paying exorbitant fees for them. In fact, when Nubank introduced its no-fee credit card eight years ago, it was the first bank in the region to do so.

However, what Brazilians do have is a high rate of mobile phone usage; over 90% of people in the country have a mobile phone and, on average, Brazilians used their smartphones 5.4 hours per day in 2021, according to a report from market data company App Annie Intelligence.

By offering a lower-cost digital banking model, Nubank was able to take advantage of these opportunities, growing its user base to 52.4 million as of the end of 2021 (up 58% year over year) and attracting 86.5% growth in deposits for total deposits of $9.7 billion on a foreign exchange neutral basis.

Cross-selling strategy

In addition to continuing to grow its market share throughout Brazil and Latin America, Nu also plans to ramp up its cross-selling strategy with new product launches. Customers tend to prefer simplicity when it comes to banking, and if they like Nubank, then they are likely to utilize more of its offerings rather than juggling multiple different bank accounts.

Nubank targets its offerings toward the “five financial seasons” of customers: spending, saving, investing, borrowing and protecting. In 2021, new product launches included Marketplace, Ultraviolet (premium) Credit Cards, Secured Cards, Apple Pay (AAPL, Financial) / Google Pay (GOOG, Financial)(GOOGL, Financial) /Whatsapp Pay (from Meta Platforms (FB, Financial)) and Life Insurance and Proprietary Funds.

The bank identifies increasing revenue per customer as a key challenge because, despite its rapid customer acquisition, its revenue per customer is about a tenth of what Brazil’s traditional banking giants rake in.

It’s not likely that the company will be able to close this gap completely because its entire business strategy focuses on the lower-income market, and Brazil has one of the worst wealth inequality situations in the world with a Gini index rating of 53.4, making the list of the top 10 countries with the most wealth inequality. Still, it could aim to improve revenue per user at least a little, and it would certainly benefit from any improvement in the economic conditions of lower-income Brazilians.

Valuation

When it comes to Nu’s stock, many investors feel compelled by the story but balk at the valuation. Nu has a forward price-earnings ratio of 916.89 based on analysts’ estimates for 2022 earnings.

It’s important for investors to keep in mind that many gurus are able to invest in stocks before their initial public offering, so those reporting holdings in Nu after its IPO may have acquired their shares at a significantly lower valuation than what is available to the public markets now.

This is one of the many reasons why it’s not a good idea to follow famous fund managers into a stock without doing your own due diligence first. It’s possible that a big-time fund manager acquired shares at a much cheaper price before the IPO rather than buying them on the open market, and there’s no way of telling if they would buy more at current prices until the 13F holdings for the ongoing quarter are released.

There are also several factors that could impact Nu’s valuation multiples going forward. For one, growth could slow down due to competition; Nu doesn’t have a monopoly on digital or lower-fee banking and following its success, several competitors have cropped up, though Nu currently still has the biggest scale advantage. Additionally, if Brazil’s economy were to enter a recession again, profits could suffer.

Takeaway

Since its founding in 2013, Nu Holdings has taken the Brazilian market by storm, making affordable digital banking services available for millions of people. Market enthusiasm for the stock is reflecting this with high forward earnings multiples.

Despite the high valuation, the company has a significant growth runway ahead, and the fact that a diverse group of highly successful fund managers such as Buffett and Wood hold the stock is a promising sign.

It’s certainly worth a spot on my watchlist; I’ll be keeping an eye on user growth, new product offerings, earnings and the loan portfolio as well as which gurus are buying (or potentially selling) the stock.

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