The stock of Nu Holdings (NU -1.37%) has been on a downhill slide since the company joined the U.S. public market on Dec. 9, 2021. Unfortunately for Nu, it came public during a terrible economy in its primary market of Brazil and deteriorating investor sentiment in the U.S. stock market. If an investor just looked at the company's price history, they might think something is wrong with Nu. However, they would be mistaken. Here is one big reason to believe in Nu Holdings.
Nu Holdings has successfully transitioned into a multiproduct fintech
Nu Holdings is one of the few fintechs globally that has successfully transitioned from a one-product company to a multiproduct company. The company started building its business with credit cards and has successfully created one of the strongest consumer brands in Latin America.
Nu used its credit card business to finance the development of new business lines that include savings accounts, personal loans, business accounts, insurance, investment, and crypto.
Image source: Nu Holdings.
One significant advantage Nu gains by offering multiple products to consumers is that it can cross-sell and upsell products. Upselling is when customers purchase a higher-end product than the product initially purchased; cross-selling is when customers buy complementary merchandise or services.
Increasing cross-selling and upselling while growing customer engagement is the company's primary way of maximizing a key customer monetization metric -- average revenue per active customer (ARPAC).
Image source: Nu Holdings
The middle chart in the above image shows that Nu currently averages 3.7 products per customer. The chart on the right shows that the company generated a monthly average ARPAC of $7.8 in the second quarter of 2022. The chart also shows that the company's older customers from the first quarter of 2017 are already generating a monthly ARPAC of $21 because customers often buy more products the longer they remain customers.
Today, Nu primarily generates its ARPAC from its credit card and savings account products. But a good portion of the company's revenue-growth upside over the next several years will occur when Nu monetizes its personal loans, investments, insurance, crypto, and other future products through cross-selling. As a result, you can expect the average monthly ARPAC to continue rising well above the current $21 of its older customers.
For instance, Nu Holdings Chief Financial Officer Guilherme Marques do Lago estimates the ARPAC of incumbent Brazilian banks at $40. And he believes that although Nu may never reach an ARPAC of $40 (incumbent banks charge fees that Nu Holdings doesn't charge), the company has plenty of room to close the gap between Nu's current average monthly ARPAC of $7.8 and $40.
Why is raising the monthly ARPAC important?
Image source: Nu Holdings
Nu increased its revenue 230% year on year to nearly $1.2 billion after neutralizing the impact of foreign currency exchanges -- a record-high quarterly revenue. Management attributes this growth to the compounding effect in two areas: the growing number of monthly active customers, and rising product upsell and cross-sell levels. So the ability to sell multiple products to existing customers ultimately drives the company's blazing-hot, triple-digit revenue growth.
A severe recession can stop this train in its tracks
While Nu Holdings is very recession resistant, it is not immune to a severe slump. Latin America currently faces unusually high risks of a downturn. Should financial distress become dire in Brazil, the credit quality of the company's loan portfolio may deteriorate, and its expected credit-loss allowance might be insufficient to cover the losses, which would devastate the business.
Nu Holdings sells at a price-to-book (P/B) ratio of 4.9, which is high compared to a similar U.S.-based fintech bank SoFi Technologies (SOFI 0.26%), with a P/B ratio of 1.19. Nu's price-to-sales (P/S) ratio is 8.2 compared to SoFi's P/S ratio of 4.5. Should a deep recession occur and Nu's growth or other fundamentals deteriorate, its valuation is due for a steep drop.
However, even though economists warn of a global recession, the Organisation for Economic Co-operation and Development projects Brazil to grow 0.6% in 2022 before picking up to 1.2% in 2023 -- modest growth. Additionally, even if the Brazilian economy shrinks, investors should have advance warning by keeping a close eye on Nu's 15-90 nonperforming loans (NPL) ratio, a metric that shows what percentage of borrowers who are between 15 to 90 days past due. Management considers the metric a leading indicator of its loan portfolio health. And currently, the ratio is at 3.7% -- a picture of stable asset quality.
Investors should also be comforted that the company in just its second year in business survived the 2014 Brazilian economic crisis -- the second most severe in the country's history. So, if you are looking for a sturdy company due for a strong rebound out of the current poor economic environment, you might consider picking up a few shares of this high-octane fintech.
