Warren Buffett is known for embracing a value investing model, which entails finding stocks that look undervalued relative to their intrinsic worth. It's why you'll often see stocks with low valuations in the Berkshire Hathaway portfolio.
That's far from the only thing Buffett looks for in a stock. The most important thing he looks for is a great company. He has said, "It's better to have a part interest in the Hope Diamond than to own all of a rhinestone." He defines a great company as having an enduring competitive advantage in a stable industry.
One of Buffett's newer positions in Berkshire is Brazilian fintech startup Nu Holdings (NU -1.37%), which saw its stock price fall nearly 60% in 2022 despite excellent performance. Could this beleaguered fintech be one of the best stocks to own in 2023?
Driving a Brazilian banking revolution
There are few public companies that performed as well as Nu Holdings, under its banner Nubank, in 2022. A sampling of third-quarter metrics includes a 171% year-over-year revenue increase (currency neutral), a 61% increase in monthly average revenue per active customer (ARPAC), a 46% increase in customer count over last year, and a 150% increase in the interest-bearing portfolio.
Nu's mission is to make banking and finance easy for customers, and its business is built on a digital infrastructure that breaks through several barriers to entry for its target markets. It has developed products across a range of financial solutions, such as personal banking, investing, and insurance for customers that often have limited access to traditional banking services because of location or other issues.
Nu has been around for less than 10 years and has demonstrated staggering growth in the markets it serves, including its home market of Brazil as well as other Latin American countries.
It also caught the attention of Berkshire Hathaway, which invested $500 million in Nu Holdings in June 2021, just prior to its initial public offering (IPO) in December of that year.
Nu has enormous potential for growth
Past performance isn't a great reason to invest in any company unless you can confidently envision continued solid performance. There are plenty of reasons to believe Nu is just getting started, and it's easy to see how its stock could skyrocket this year.
Although it has already captured a large chunk of the Brazilian market, with 39% of the adult population in Brazil having a Nubank account, there's still a majority not on the platform. And its new market of Colombia is growing even faster. Together, these markets account for 60% of the Latin American economy, and Nubank's 70 million customer count is only about 10% of the total Latin American population of more than 650 million.
Within the current customer count, there are many ways Nubank can grow revenue, which is why ARPAC is an important metric of company growth. For example, there are fewer than 1 million total insurance accounts and only 6 million investment accounts. It will take time to grow these numbers and for Nu to become a real powerhouse financial company.
What could go wrong?
As a growth company, Nu has focused on expanding at the expense of profitability. But it has scaled so well that it posted a $7.8 million net profit in the third quarter for the first time as a public company. Earnings per share (EPS) of $0.1 beat Wall Street's expectations of breaking even. Wall Street is expecting that to continue with improved profitability going forward. However, a company at this stage doesn't always post profits reliably, and a loss would be a big setback.
There could also be challenges related to interest rates and the broader macroeconomic environment. Although investors are hoping for stronger market performance in 2023, the economy is still suffering. As a bank, Nu is very sensitive to interest rate changes. So far, with its growing portfolio, the increase in net interest income is outweighing the increase in defaults.
However, the central bank in Brazil is keeping interest rates high, as in the U.S., and economic activity is expected to keep contracting in response. This could negatively affect Nubank's business and profitability in 2023.
A newly attractive valuation
With the decline in stock price, Nu's price-to-sales ratio plummeted from more than 30 at the IPO to just under 8 today.
NU PS Ratio data by YCharts
That's a valuation that more investors can stomach.
Personally, I like to invest in companies that have a large range of revenue-producing activities, and Nu's broad product assortment gets a thumbs up from me in that regard.
With its high growth, improving profitability, real-value solutions, and lower price-to-sales multiple, Nu is starting to look like a compelling buy, and it could be one of the best stocks to own in a 2023 bull market.
