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Warren Buffett Is Backing Another IPO -- Here's What You Need to Know

By Bram Berkowitz – Sep 1, 2021 at 6:01AM

Key Points

  • Nubank is a fintech challenger bank that has disrupted the Brazilian banking market.
  • Nubank offers two different types of credit cards, a digital bank account, personal loans, life insurance, a bank account for businesses, and payment and investment capabilities.
  • The company was not profitable in 2020, but may get a valuation ranging anywhere from $40 billion to $100 billion, according to media reports.

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In recent years, Buffett and Berkshire Hathaway have invested in more newly or soon-to-be public companies. They're about to have another on their hands.

Investing in initial public offerings (IPOs) continues to be more common for legendary investor Warren Buffett and his company, Berkshire Hathaway (BRK.A -0.82%) (BRK.B -0.90%). After investing in the highly touted Snowflake IPO toward the end of 2020, Berkshire in June made a $500 million investment in Brazilian fintech company Nubank, which is now reportedly preparing to go public before the end of this year. Here are three important things to know about Nubank.

1. Largest challenger bank in the world

Nubank launched as a challenger bank in 2013 to help Brazilians find a simpler solution for their banking needs in a country with a volatile economy and incredibly high banking fees. Challenger banks are normally smaller, technology-driven banks that attempt to lure customers away from larger, more traditional banks. They tend to offer better customer experience and often better pricing on financial products, which they are able to achieve because technology allows them to cut out many of the legacy costs that traditional banks still have.

Indeed, Nubank's technology, product offerings, and forward-thinking culture has helped grow the company to more than 40 million users. It's no longer just the largest challenger bank in Brazil or Latin America (it has expanded to Mexico, Argentina, and Colombia), it's now the largest in the world.

While not technically a licensed bank, Nubank offers many attractive banking products, including two different types of credit cards, a digital bank account, personal loans, life insurance, and a bank account for businesses. The digital bank account has no maintenance or deposit fees, though it does charge for withdrawals. Nubank also offers payments through the Brazilian central bank's PIX instant payments system, which enables customers to conduct instant transfers, pay bills, and make purchases digitally on a cellphone. Additionally, Nubank has an online brokerage for customers to invest in stocks, fixed income, real estate funds, and more, some of which are commission-free.

Warren Buffett

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2. Nubank is not yet profitable

At the end of 2020, Nubank reported a loss equivalent to roughly $44 million, which is a 26% improvement from the loss it reported in 2019. Annual revenue hit close to $1 billion, up nearly 80% from 2019, while total users at the time was 33 million (Nubank now boasts 40 million users). Credit card transactions were up 49% to more than $18 million and Nubank reported lending out more than $19 million in 2020. Additionally, the company reported that it has 28 million accounts registered in Brazil's instant PIX, which is nearly one-fifth of all keys registered.

"This result shows that our revenues are growing at a faster rate than expenses," said Nubank CFO Guilherme Lago about the 2020 results, according to the publication Latin America Business Stories. "The loss is a business decision. We now choose to continue investing the margin we generate in teams, services and products, instead of already making a profit. We can generate profit at any time, but at this stage of our company, we want to continue growing together with our customers."

3. It could be another big winner for Berkshire

While it gained new notoriety with the recent backing from Buffett, Nubank has been a very promising fintech for a while now, having raised $2.3 billion in total funding from a number of prominent venture capital firms including Sequoia Capital, TCV, Ribbit Capital and many more. With the IPO currently expected before the end of 2021, Buffett and Berkshire may soon have another big winner on their hands. After Berkshire's $500 million investment, the valuation of Nubank grew from $25 billion in January to $30 billion.

Various news reports on the rumored IPO suggest that the company may look for a valuation anywhere in the range of $40 billion to as much as $100 billion, with the top end seen as a bit of a stretch. But there is plenty of room in between for Buffett to double his investment in just six months.

Should you invest?

Even if this investment doubles or eventually triples for Buffett, the gain likely won't budge Berkshire Hathaway's equities portfolio, which is now worth more than $300 billion. But Nubank could still be a good investment for a retail investor. It is disrupting traditional financial services in a massive market, one that has historically been difficult to maneuver in.

However, I think we will need to get a look at Nubank's registration statement to further home in on the financials before making a decision. A final valuation would also be good to have, as $40 billion is quite a different story than $100 billion. But this information should be coming within the next few months if the rumors about Nubank going public before the end of 2021 are true, so keep an eye out.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Snowflake Inc. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

Stocks Mentioned

Berkshire Hathaway Stock Quote
Berkshire Hathaway
$307.78 (-0.90%) $-2.79
Berkshire Hathaway Stock Quote
Berkshire Hathaway
$464,837.50 (-0.82%) $-3,862.50
Snowflake Stock Quote
$136.73 (0.81%) $1.10

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