Investing legend Warren Buffett is known for his value approach to investing, and his portfolio includes positions in blue-chip stalwarts such as Coca-Cola and Bank of America. However, he also has smaller positions in some stocks that don't fit the usual Berkshire Hathaway playbook. Nu Holdings (NU +0.47%), for example, is far from a value stock, and Berkshire Hathaway was an early investor even before it became a public company.
Nu Holdings was originally highly valued, but it's grown into its valuation and looks like a compelling deal right now. In fact, Nu stock looks like it could skyrocket, and pretty quickly. Let's see why.
A different approach to an old business
Nu Holdings operates NuBank, a digital bank headquartered in Brazil. The founders, who are still managing the company, created NuBank to offer a modern approach to banking that meets the needs of its target population.
The bank is completely digital, and it offers low-cost financial services to its clientele. It has broadened its services to cover a complete assortment of personal banking products, from bank accounts and digital payments to insurance and investments.
Banking in Brazil has traditionally been concentrated in five large banks, and it has been difficult to penetrate the system. Over time, Nu has made headway and grown in popularity, now counting 44% of the adult Brazil population as customers.
Catching on and catching up
This has led to incredible growth in pretty much all areas. As a low-cost alternative, the bank has taken time to increase sales enough to cover expenses, but it recently recorded two consecutive quarters of positive adjusted profit as well.
There was some pressure earlier in the year as inflation set in, and it took some time for the company to raise fees in accordance. But it did that successfully and is now on the way toward sustained profitability.
Data source: Nu Holdings.
A wide-open growth runway
Although Nu Holdings is getting close to having half the adults in Brazil as customers, it's still growing in that market. In the meantime, it has also entered Mexico and Colombia, and customer growth is rapidly increasing in both countries.
Management hasn't discussed entering other new markets yet, and it wouldn't make sense at this time; its other markets are young, and growing too quickly would increase expenses. However, that option exists for when the time is right.
Within each market, there are also incredible growth opportunities in cross-selling and upselling. Nu attracts customers with its lower-priced bank account services, and satisfied customers eventually add other products to their accounts. In the 2022 fourth quarter, monthly average revenue per active customer was $8.20, up from $5.60 last year. By comparison, its legacy rivals average $23 per customer.
In its core market of Brazil, growth is still outstanding. Revenue increased 110% year over year in the fourth quarter, and gross profit margin expanded from 36% to 44% during that time.
NYSE: NU
Key Data Points
Where can it go from here?
To triple in price, Nu stock would need to go from a market cap of $25 billion at a little more than $5 a share to $75 billion. Today, Nu stock trades at a price-to-sales ratio of a little more than 7. At the same ratio, Nu's trailing-12-month revenue would be $9.4 billion. It's already $4.8 billion, so that already seems very doable.
The price-to-sales ratio won't necessarily stay where it is right now, but at the company's current growth rates, it seems highly likely that it's stock will rise, and it could triple your money in three years, if not much sooner.
