The Brazilian digital bank Nu Holdings (NU 1.58%) recently reported earnings results for the fourth quarter of 2021, its first earnings report since going public toward the end of 2021. The results looked strong, driven by huge revenue growth. Nu also added millions of new customers to its already huge base and showed growth in other key metrics as well. While there is a lot to analyze, one metric that investors should focus on is monthly average revenue per active customer (ARPAC), because it has the potential to more or less make or break Nu. Let me explain.
Why ARPAC is so important
At the end of 2021, Nu had about 54 million customers, which is a huge amount. But as those in banking will tell you, while having lots of customers is great, you need to be able to monetize that base. Some customers may cost you more to serve them than they are worth. One key metric that helps Nu determine how well it monetizes its customer base is ARPAC. Nu defines this metric as average monthly revenue divided by the average number of individual monthly active users for any given period.
Image source: Getty Images.
In the fourth quarter, Nu's ARPAC rose to $5.60, up 14% from the sequential quarter and up nearly 70% year over year. It's good growth, but ARPAC at Nu still pales in comparison to traditional banks in Brazil that have monthly ARPACs between $35 and $38.
I doubt any investors would expect to see Nu's ARPAC that high right now, considering Nu's whole business model is predicated on the idea of attaching much lower fees to its products than those seen at traditional banks in Brazil. It's one of the main reasons customers in Latin America love Nu. But long-term, it is still a metric that investors expect to go up.
Interestingly, management noted that among their more mature cohorts of customers, who have been with the bank longer and tend to make Nu their primary bank and use multiple Nu products, ARPAC has exceeded $15.
Image source: Nu Holdings Q4 2021 investor presentation.
These charts may be a little hard to view, but the one all the way to the right shows that customer cohorts that joined Nu early in 2017 -- about 57 months ago -- now have ARPACs of about $15 or more. Nu Chief Operating Officer Guilherme Marques do Lago said he thinks this is something that investors are not fully baking into their assessment of the company:
As the cohorts season, as the cohorts mature, you can see that we become the primary banking relationship of more and more of those customers and we increase the usage and the engagement and the purchase volumes with our core products. And then secondly it's the cross sell, as we launch new products, as we launch new features, we actually increased this now average revenue per active customers.
The chart on the right also shows that newer cohorts are starting to make progress to the $15 ARPAC number faster than older cohorts, which Marques do Lago attributed to the fact that the bank now has many more products and offerings than it did in 2017.
It's still not a guarantee
When pressed about risks for the bank, Marques do Lago said that while ARPAC trends look strong, he still sees it as one of the main risks for Nu. I, too, believe that the recent trends support ARPAC growth because the company is greatly expanding its product base into different lending capabilities, an investing platform, and an e-commerce marketplace that now has 20 different partners. This should drive engagement.
But considering the macro environment in Brazil and Latin America, consumer demand could be fragile in the future. Nu is an industry leader when it comes to customer acquisition costs, but those could also rise if competition emerges, making ARPAC growth critical. Ultimately, investors will want to keep a close eye on ARPAC, its growth rate, and customer cohort maturation trends, because the direction of ARPAC has the potential to make or break this stock.
