The Brazilian digital bank Nu Holdings (NU 0.93%) recently reported its best quarter as a public company, while also maintaining the fast growth that has allowed it to become a banking disruptor in Latin America.
That's a good sign in a market that has been wary of growth at all costs and companies that don't have a clear path to profitability.
If Nu can continue to build on this trend, there's no reason this can't be a great long-term stock. But doing so will require Nu to continue executing its strategic roadmap. Here's how the company can continue to become more profitable.
Assessing ARPAC
In the third quarter of the year, Nu reported net income of $7.8 million -- and did so while adding more than 5 million customers and hitting record revenue of roughly $1.3 billion.
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One of the key ways to assess profitability at the company is by looking at the monthly average revenue per active customer (ARPAC), which the company updates quarterly. In Q3, ARPAC grew from $7.60 to $7.90, well below some of the large banks that have monthly ARPACs ranging from $33 to $54. Nu may never reach an ARPAC in the higher end of this range because the company's business model is predicated on lower-fee banking products.
But customers in some of Nu's more mature cohorts are reaching ARPACs of roughly $22, which is up from $15 in the fourth quarter of 2021. Nu should be able to continue raising ARPAC, given that its customer base has a similar socioeconomic breakdown as incumbent banks, with 8% of its customer base considered high-income customers and 43% middle income.
Driving cross-sell
Two big ways Nu drives ARPAC expansion is through new products for customers and new paths for them to engage with Nu's ecosystem.
Nu's Chief Financial Officer Guilherme Marques do Lago said ARPAC for mature cohorts now is largely composed of interchange fees on Nu's credit and debit cards, while a very small percentage of customers have taken out personal loans. But in the future, Marques do Lago expects to see more ARPAC being associated with personal loans, which can be a high-margin product if loan losses can be managed accordingly.
Currently, due to tough economic conditions in Brazil, Nu has tightened credit underwriting and personal loan originations declined in Q3. However, management said if conditions keep trending the way they are, the company might ramp up unsecured personal loan originations this quarter. Nu also is expecting to roll out its secured personal loan business in 2023, which also could boost ARPAC.
And, even though it's a touchy subject right now given what just happened to FTX, Nu has seen a ton of interest in its crypto division, NuCripto, which allows customers to buy and sell cryptocurrencies. NuCripto has gone from no customers a year ago to more than 1.3 million active customers at the end of Q3.
Nu also announced its plan to roll out its own cryptocurrency to use for a potential rewards program, and management sees this as a way to drive engagement. This could help keep customers in Nu's ecosystem longer and perhaps lead to a higher cross-sell rate. Again, Nu will need to be cautious here, but it helps that it is a public company and investors have access to detailed financial statements every three months.
Responsible growth
Management has a tough task ahead. Investors are going to be pushing for ARPAC expansion, which will increase profitability. But when you think about some of the ways Nu plans to achieve this, management will also need to tread carefully to not push for growth too aggressively.
It also will be dealing with headwinds from the struggling Brazilian economy, which may not allow it to ramp up personal loans as much as management would like. There also is likely to be more regulatory scrutiny of crypto offerings and products.
But there's no reason to think management won't continue responsibly, given that they've done a good job of balancing growth and profitability so far. I think there's plenty of room for Nu to continue to build ARPAC and drive gains for shareholders.
