Late last year, Warren Buffett and his holding company Berkshire Hathaway bought shares of a South American bank called Nu Holdings (NU +0.62%). Buffett owns several American bank stocks, of course, including Bank of America, U.S. Bancorp, Bank of New York Mellon, and Citigroup. But I'm most excited about Nu because I think it has the largest upside.
Buffett and Berkshire invested $1 billion in Nu, which is a tiny investment for him. (He reported having over $41 billion invested in Bank of America in Q1). If you dig into his Nu investment, you'll see it's an unusual bank stock for Buffett. It was an IPO investment -- as was data warehouse specialist Snowflake when Buffett bought shares at the IPO. And it's a foreign bank based in Brazil -- Buffett mostly buys American stocks.
But perhaps the biggest difference is that Nu is an internet bank that doesn't have a brick-and-mortar operation. That's why many people classify Nu as a fintech stock as much as a bank.
Image source: Getty Images.
Buffett paid too much for his shares -- the stock is down more than 50% from its IPO price. But I think investors should ignore this short-term volatility and trust in Buffett's financial acumen. Nu is winning fans and finding millions of new customers in South America. The bank has amazing revenue growth, and there's a reason for that.
Here's why I think Nu stock is a buy -- particularly at these prices.
Bankers in South America are afraid
Fear of crime -- both armed robbery and fraud -- is prevalent in the banking industry in South America. Of course, crime is always a concern everywhere, and bankers everywhere are right to be vigilant about things like theft or fraud. But you can go too far in that direction. Consider the experience of Nu co-founder David Velez, when he tried to open an account at one of Brazil's largest banks: "As I approached the first bulletproof door that was flanked by armed security guards, I sensed this was not going to be easy. During the following four months, I spent long hours in queues, calling the call center, and returning to the bank branch with an increasing number of documents."
It took him four months to open a bank account. Banks need to protect their money from fraud and identity theft, but that's a lousy customer experience that's ripe for disruption.
You can see how an internet bank would be a great improvement. No longer do you have to worry about armed bank robbery, for one thing. And if a bank doesn't provide a vast number of brick-and-mortar offices, you can pass those savings on to your customers. The internet makes your banking operation faster, cheaper, more efficient, and more secure. And that all results in happier customers.
NYSE: NU
Key Data Points
Nu is wildly popular
Net promoter score (NPS) is an imperfect metric designed to measure whether your customers are promoting your service to their friends and family. It's an unreliable metric, to be sure. People might say they're promoting your business, but that doesn't mean they actually are.
Nonetheless, Nu has an amazing NPS of 90 in Brazil, and 94 in Mexico. While I tend to be cynical about NPSs, that's an impressive number. Clearly, Nu has some rabid fans. According to customergauge.com, the banking industry in the U.S. averages an NPS score of 27. Citigroup and Bank of America both scored an 18 on this metric. Nu's score suggests it is one of the more popular brands on the planet.
| Company | Net Promoter Score |
|---|---|
| Tesla | 96 |
| Nu Bank | 90 |
| Starbucks | 77 |
| Airbnb | 74 |
| Netflix | 68 |
| Amazon | 62 |
Nubank NPS score from company's SEC filings; other NPS ratings from retently.com.
Nu is already a massive bank -- and it's doubling in size every year
There are 600 million people in Latin America, and Nu Bank has already captured 10% of the market. Those people have deposited $12 billion at the bank. And the company says that 80% to 90% of its customer acquisition is organic.
How fast is it growing? Consider that Nu had just 3.7 million customers in the first quarter of 2018. Four years later, that number is up to almost 60 million.
In Brazil, 33% of the country now banks with Nu. And the bank is adding another 1 million to 2 million customers every month in its home country. Mexico and Colombia have smaller numbers that are growing substantially.
Latin America is a huge market opportunity, with $6 trillion in GDB and a financial services industry with an estimated market cap of $1 trillion. But banking has largely been an upper-class affair in the region, involving rich people who don't mind paying high banking fees. Nu is claiming the unbanked in the region and is grabbing a huge share of the working poor and the rising middle class. Almost 10% of its customers have never had a bank account or a credit card before.
The stock is a steal at $4 a share
Nu's current market cap is $20 billion. So it's already a very large bank. But it's growing like a weed. It had 226% year-over-year revenue growth in its most recent quarter. I find it remarkable that a bank -- which is essentially a commodity business that provides money to people -- is growing so fast.
While Nu currently has a price-to-sales ratio of 5 -- similar to a lot of banks -- I think that valuation is too low. And it's not just the amazing growth rates. Nu's internet business model gives it a lot of strengths versus its brick-and-mortar competition in terms of efficiency and growth potential. But perhaps the most important part of the Nu story is its strong brand and happy customers.
People who buy Nu stock now should look forward to the (relatively) quick double as the stock climbs back to Buffett's purchase price. But don't cash out. This populist bank has a very good chance of becoming the largest bank in South America.
