Like many tech and fintech stocks this year, the Berkshire Hathaway-backed Brazilian digital bank Nu Holdings (NU 1.98%) has seen its stock price struggle and is down more than 61% this year. Nu is a major disruptor in the Latin American banking space, first offering a credit card with no annual fees and then building out a suite of banking products from there. Nu has amassed close to 60 million customers but in the past has gotten questions regarding its high valuation and path to sustainable profitability.
Still, despite volatility in the market and bearish sentiment toward growth stocks, here is one reason I think Nu is heading in the right direction.
Image source: Getty Images.
Growing ARPAC
Nu has been able to acquire tens of millions of customers with a customer acquisition cost of $5, which is one of the lowest in the industry. The bank is incredibly popular in Brazil and growing in Mexico and Colombia. These accomplishments should certainly not be ignored, but customers are typically only valuable to a company if they can be monetized. Because one of Nu's propositions has been to offer products with much fewer fees than incumbent banks in Latin America, it has naturally been challenged to generate a high average revenue per active customer (ARPAC). But Nu has been improving this metric in recent quarters.
Image source: Nu Holdings.
If you look at the third chart all the way to the right, you can see that the ARPAC at the end of the first quarter was $6.70. That's up from $3.50 about a year ago, so the bank is growing monthly ARPAC nicely. Now, $6.70 is still low compared to retail incumbent banks in Brazil, which have monthly ARPACs of about $40, but if you look at some of Nu's most mature cohorts, monthly ARPAC hit $19 in Q1, which is also up from the sequential quarter.
On the company's earnings call, Nu's CFO Guilherme Lago attributed ARPAC growth largely to stronger penetration of the Nu bank account and credit card. But he added that customer penetration of Nu's other products, such as personal loans, is still quite low. In fact, Lago said that customers that have used all three of Nu's main products, which include the bank account, the credit card, and a personal loan, have an ARPAC of about $35 to $40. Nu is also rolling out many other products, including insurance, investing, and a marketplace that will hopefully contribute to ARPAC growth in the near future.
When ARPAC grows, the company obviously does well. In the first quarter of the year, Nu generated a record revenue of $877 million, which came in much higher than analyst estimates for the quarter.
On the right track
There's more that will be important for investors to watch when it comes to Nu other than just ARPAC. Investors will also want to keep a close eye on asset quality among Nu's loan portfolio and broader economic factors in Brazil as well. But ARPAC is a key performance indicator and is definitely trending in the right direction after Q1. If Nu can keep growing ARPAC, then it has a very good chance of being successful.
With Nu now trading at less than an $18 billion market cap, investors have the ability to buy in at a lower valuation than Buffett and Berkshire. The road likely won't be linear, but I do think Nu is a good long-term buy at these levels.
