Digging Into the Nubank IPO

In this episode of Industry Focus: Financials, Motley Fool analyst Jason Moser and Motley Fool contributor Matt Frankel dig into Brazilian fintech Nu Holdings (NU 1.24%), known as Nubank. They'll take a look at what the company does, how it has grown, and what its market opportunity is.

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This video was recorded on Dec. 6, 2021.

Jason Moser: It's Monday, December 6th, I'm your host Jason Moser. On this week's financial show, we're taking a closer look at another IPO coming here in the financial space, Nubank. Joining me this week to take a look at it all, it's certified financial planner, Mr. Matt Frankel. Matt, how is everything going?

Matt Frankel: Well, my portfolio is not doing that great, but I'm doing fine. [laughs]. I don't know about you, but I feel like having my own personal bear market over here.

Jason Moser: Well, I think that feeling is probably contagious. I think a lot of people are probably feeling that way these days. As we know, it's obviously a feature of investing. It's one of those things that comes with the territory and you have to get used to it. I'm glad you brought that up because for newer investors it's difficult. For newer investors, it's really difficult to look at days or stretches like we've been going through here, seeing all that red and being able to reconcile that, hey, you know what? Everything is probably going to be OK. The more you go through these types of situations, the more you go through these types of stretches, the easier it gets, the more you can stomach that volatility. I don't know about you, Matt, and before we get into Nubank, maybe we could just throw a tip or two out there for folks in dealing with this volatility. For me, we always hear the same old well, we're focused on the long term and that's correct to a degree. But for me, I look at stretches like this and it really just makes me feel better about having a very well-diversified portfolio. I'm not just exposed to a bunch of growth stocks and leaving it at that. I do have some boring names in my portfolio that while they may not light the world on fire, they provide me a little solace during stretches like this. What about you?

Matt Frankel: The gross stocks I do own are the kind that don't have a ton of debt and are not necessarily profitable, but are close to it and aren't going to go anywhere. I like my diverse portfolio and you're right, it does get easier as time goes on. No one likes watching their portfolio go down. Yay, $100,000 is gone. [laughs]. But you condition yourself to think of it as an opportunity rather than a problem over time and it's easier said than done. It took me years to get into that mindset.

Jason Moser: Me too and that's just it. You and I collectively have been at it for quite some time so we have some experience under our belts there. For those of you who are still a bit newer to the game, don't let stretches like this scare you away things will get better. You have to be able to stomach this type of volatility in order to really benefit from ultimately what long-term share ownership brings you and I can testify. If you hang in there, stay patient, just collect yourself a bunch of really good businesses then you will see those results over time. The longer that you do it, the more that becomes apparent so hang in there that's what we're trying to say. With that, let's take a look at an IPO that's getting ready to hit here. I think actually it's slated for December 8th. This is Nubank. We've had a few people on Twitter reach out to us and asking about this company and we thought, well, if we have the bandwidth to jump into it, we will and so thankfully we do have the bandwidth to do it. Let's talk a little bit about Nubank because this is, as I said, an IPO that's getting ready to price on December 8th. In simple terms it's a bank. I guess it's a digital banking platform. Let's talk a little bit about what Nubank does exactly.

Matt Frankel: Yes. They are Brazilian fin-tech company, which there's a bunch of those that we follow. But this is, as the name implies, it's designed to be an alternative to the traditional banking system. Brazil's banking system works a little bit differently than ours and that it's dominated by a few big players. Everyone knows that our banking system has the big companies. You have the JPMorgan's, you have the Citigroup, you have the Bank of America's. But picture Brazil system as if the banking system had the big four and only the big four. They don't have the regional banking networks. They don't have the credit. They don't have 5,000 different banks like we do. A few years ago, the government actively promoted fin-tech disruption and Nubank is emerging as the winner. Even at the low end of their IPO valuations they going to have a bigger market cap than Brazil's biggest traditional bank.

Jason Moser: This is going to be something like a $40 billion market capitalization?

Matt Frankel: Yeah, and they lowered it. They've lowered the valuation they're trying to get. Honestly, given the current market conditions, I wouldn't be surprised if the price is a little bit lower than they expect. But it's favorable for the IPO investor. Remember, it wasn't that long ago in 2021 when IPOS, were doubling on day one and stuff like that. This could actually be a net positive for the retail investor who can get into the same valuation that the big guys are getting it on it.

Jason Moser: I think that's a really good point there. I'm glad you brought that up.

Matt Frankel: But I guess I didn't answer your question as to what they do.

Jason Moser: Well, let's jump into that thought. A digital banking platform, that really does go at a number of different directions. But ultimately, when you look at the company, when you look at this business and their mission, it's a very big picture mission. The mission itself to fight complexity, to empower people. They're trying to make things simpler, to give people more control over their financial freedom, their financial lives, and I think we can all get behind that. But exactly how do they do that? They provide generally speaking, banking services?

Matt Frankel: I would compare their business model. I guess the closest company I can think of in the US is SoFi.

Jason Moser: Okay.

Matt Frankel: They offer personal loans, they offer a credit card, they offer what they call cash management accounts, which are like a checking alternatives. They offer an investment product sounds like SoFi's business model. [laughs]. It's really caught on it. It's like as if SoFi wasn't competing with a bunch of other banks of its same-size. It's a Brazilian company. It operates in Mexico and Colombia also. One out of six people in all of those markets are Nubank customers so this is a popular platform. They've grown their customer base in the past three years. Their customer base has grown from 3.7 million to over 48 million.. This is a very popular idea in Brazil and these other markets. That the financial system should not be dominated by a few legacy players, that there is a better way to bank. Nubank says it's saved its customers something like almost $5 billion in bank fees compared to the legacy players. That's a big deal.

Jason Moser: It's a very big deal. [laughs].

Matt Frankel: Like l said I'd compare it mostly through a SoFi. I don't necessarily want to call it the SoFi Brazil because one of my big pet peeves is when you call the something of something else.

Jason Moser: No, I appreciate that. It's funny you brought up SoFi because when I was looking through the S-1, I saw this little story in 2014, they launched their first product, the new credit card, which was a purple MasterCard branded credit card. That was, they launched that in Brazil. That actually made me think of SoFi. I know SoFi was almost student on this side, but it just started with the simple concept, something to try to make people's lives a little bit easier, a little bit better and we talked a lot about SoFi on this show. I think it's safe to say that you are a fan of that business and I'm certainly very encouraged by it as well. It just starts with one little idea, but then you look at that big mission and you can see how many different avenues of growth they can pursue with just this simple concept of trying to empower people by making things simpler.

Matt Frankel: There's a lot of different growth verticals here. Like we talked about SoFi, the big potential here is cross-selling. If you get people into your ecosystem as a credit card customer, you get them to sign up for a bank account too. You get them to start an investment account. When they start a small business, they'd start a business account. They need insurance, they're going to buy from you because you're saving the money. There's a lot of cross-selling potential here to generate revenue and that's what I think the market is missing about SoFi as well as Nubank is that the average customer has just one or two products with the company and there's room to expand that to 6, 7 over time.

Jason Moser: That's really impressive to think about. Going back to just the customer base that they have that's really when you look at they quote this in ASOS one there. Their market opportunity, generally speaking, is Latin-America. Brazil is going to be obviously a big portion of that opportunity. But, with 650 million people, they quote in Latin-America as their opportunity of 48 million customers. Not only do they have room to grow on the customer side, but as you mentioned, the cross-selling as well, I think that really demonstrates the potential here which I think for investors they should be very encouraged. What do you feel like could make this a good investment?

Matt Frankel: I generally don't invest in fin-techs, especially foreign ones right when they go public. It's really tough to tell how they're going to be a good investment if they're going to be able to continue their growth story because when their growth the past few years has been phenomenal and is honestly not that sustainable, their three-year growth rate has been 110 percent in terms of customers. You can only double year-over-year for so long when you get to this size. The 48 million customers if they were to double for two more times that would be the entire market of Brazil. That 110 percent figure is not going to be around forever. The big question is, how many products can they sell to each of their customers? How can they build up their per customer revenue by expanding into all these other verticals and things like that? Because if their per customer revenue continues to grow, that's what I would become interested and say, this really has legs, it can be sustainable.

Jason Moser: One thing I noticed in reading up on this company,and it shouldn't really come as a surprise, I think. But they do seem to be very customer-centric, very focused on serving the customer and minimizing complaints, minimizing friction. They have a graph in the S1 that I think is really eye-opening. It refers to the number of complaints received per one million customers. Over the last six months of 2020 is the time-frame here. When you look at this number of complaints received per one million customers, you've got Nubank at 269. That's 269 complaints per one million customers. What does that mean? How do we put that in the context of a median in their market is 1,420 complaints per one million customers.

Matt Frankel: I saw that they've a net promoter score of 90, which if you know anything about that metric, that's off the charts good in terms of customer satisfaction.

Jason Moser: Yes. Well, and the stereotype, I think for banks, for a lot of folks, they feel like banks aren't really there to serve them. Maybe the service isn't up to par, so to speak. But it really feels like with Nubank that is a primary point of focus is making sure to give me. That's a metric I think we're paying attention because it feels to me like that's going to be one they continue to call out because it is so exceptional.

Matt Frankel: Yes, their customer service is great. You don't scale from three million to 48 million customers in [laughs] three years without making your customers happy.

Jason Moser: Yeah.

Matt Frankel: They're bringing a lot of people who were not in the financial system into their ecosystem and it's really paying off. These people are so happy to have a part, have a seat at the table, so to speak it Brazil's financial system. Just one statistic, they provided over five million people their first credit card or bank account. Five million people did not have a credit card or bank account before Nubank in Brazil. Of course these people are going to be thrilled to be joining the financially. This is a system that shut them out for generations, and now they have a seat at the table. It's really inclusive and it's a great thing socially. Investment merits aside, it's just a great thing for the world. But it's really impressive to think of how they've found this under-served group of customers and turned them into satisfied banking customers.

Jason Moser: Yeah, that's a little bit square-like to me as well, and trying to spread economic empowerment. That is a bold mission, but also I think a noble one. You look at the world, there were a lot of people out there, a lot of folks who were unbanked and under-banked. Businesses like Nubank are really, really trying to make this a fair system. I tell you the economics of the business, it doesn't really take much for them to get customers in. Banking can be very sticky. But their customer acquisition costs, they've recovered that in fewer than 12 months on average. Once you get those customers in there, those acquisition costs, they pay off fairly quickly. If you had that big suite of banking services, that can be very sticky and result in a very long tail, so to speak, of opportunity, of revenue, of growth there. I think that's really encouraging. Maybe that's why I wanted to ask you about this because it looks like that the Nubank has the backing of a certain Oracle of Omaha that I'm not going to name. But maybe you could tell us a little bit about this. They've got some big backing from a familiar face, so to speak.

Matt Frankel: Berkshire led their latest Berkshire Hathaway. It wasn't Warren Buffett himself, it was probably one of his lieutenants. Berkshire led its latest fundraising round with a $500 million investment, which gave Berkshire about two percent ownership in the bank at the time. Not only did Nubank just raise, I think a little over a billion dollars in that funding around that Berkshire led, they're going to raise over two billion dollars even at the low end of their price range. They're going to raise over two billion dollars in the IPO. That gives them a lot of growth capital to take their business really to the next level and build out products and things like that. That's more than what SoFi raised. [laughs] Its IPO.

Jason Moser: Yeah. What about leadership here? It strikes me as at least partly founder-led, but it feels like there's some passionate leadership here. What are your impressions of leadership and anything on that front?

Matt Frankel: I need to dig into the leadership a little bit more. But just reading through their shareholder letter there, in their IPO filing, you could tell that they are passionate. They really want to promote inclusivity in the Brazilian financial system and in other areas around the world too. They are not stopping there. Like I mentioned, they're already getting into Mexico and Colombia. Definitely passionate about the businesses is my big takeaway.

Jason Moser: Yeah. That's that's a good way to put it. They do have that letter from the founders in their filing there. I think it's well worth the read because you get their perspective on what really matters to them, the mission, how they plan to get there. I thought it was really neat to how they referred to the five financial seasons. I'm not sure if you read that, but there's five financial seasons. It lays out how they view the relationship with the consumer and how they can help the consumer and also helped the business capitalize on growing that relationship. The five financial seasons of spending with their credit debit cards, saving with their new personal and business accounts, investing with their directed consumer digital investment platform, borrowing with their transparent personal loans and cards and then protecting with their insurance solutions. It really does feel like they're trying to become the holistic provider in many ways. That really goes back to that cross-selling opportunity, I think.

Matt Frankel: Yeah, I would agree with that. Like I said, that's what would make me an investors if they really expand on their ability to cross-sell.

Jason Moser: What would scare you away from a business like this? What red flags or risk factors come into play that you feel like matter most for investors looking at Nubank today?

Matt Frankel: We'll expect volatility. That's what I would say with any foreign investment, especially one in Brazil at this point. Look at what StoneCo's price has done in the past year or so.

Jason Moser: It's good example.

Matt Frankel: They are not the same economy as us. They're not as resilient in terms of, they're just their general financial system. There are risks to invest in a foreign stock, not to mention foreign exchange headwinds. But what would scare me away is probably valuation. If an IPO did this double, I would be gone. If I could invest for a similar valuation or Buffett did, which he got in at about a $25 billion valuation. If the valuation makes sense, they did about a little over a billion dollars of revenue this year, so far. Doubled year-over-year. So the valuation at their IPO price doesn't seem ridiculous to me. It's what it does afterwards.

Jason Moser: Yeah, what it does afterwards. Maybe like you said, maybe going public in this type of market will prove to be a benefit for them. A couple of the things that we called out here earlier, to me that complaints metric, I'm just fascinated by that. I love that they can quantify that and I hope that we are able to follow that metric along. I hope they provide some updates there. Because I think as they grow, you talked about 650 million people and 48 million customers today. Plenty of room to grow that customer base not only on an absolute basis, but also the across selling. The bigger system gets, the more difficult it is to manage. I think we want to make sure we see that same focus on the customer play there. If we saw those complaints rising, if we started to hear more criticism or complaints regarding the service. I don't know that's necessarily reason to bail, but it certainly is. It's a reason to look more closely and try to understand what's going on. But yeah, it seems like there are a lot of neat pieces to this business. Certainly one that we'll talk about more on this show as it becomes a regular in the rotation for earnings season and whatnot. 

I feel like this is a big opportunity. We've seen the opportunity in Latin-America play out and companies like Mercado Libre, for example, which started out just as e-commerce, but now you can really look at that as a FinTech opportunity as well. [Laughs] Which is cool, I think. Nubank, it gets to play in that same sandbox. We've certainly seen where there can be some big opportunities out there. Looking forward to this one going public. Looking forward to learning more about it and watching them develop their track record as a publicly traded company. Matt, I appreciate you taking the time out this week to dig in and talk a little bit more with us about it.

Matt Frankel: Of course, always fun to be here.

Jason Moser: [MUSIC] Folks well, that will do it for us this week. Remember, you can always reach out to us on Twitter at MF Industry Focus or you can drop us an email at [email protected]. As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy yourselves stocks based solely on what you hear. Thanks as always to Tim Sparks for putting the show together for us. From Matt Frankel, I'm Jason Moser. Thanks for listening and we'll see you next week.