Nu Holdings (NU -1.21%) went public in late 2021 with the backing of Warren Buffett's holding company, Berkshire Hathaway. That was at the height of the bull market, when lofty valuations were par for the course, and investors pushed prices higher and higher.
At the time, I said the fintech was too expensive to buy, with a price-to-sales ratio nearing 60. It's hard to justify that kind of valuation regardless of how fast a company is growing, and it was interesting that it was a Buffett stock, because Buffett is known for his value style of investing.
Nu stock is now about 48% off its highs, and it's trading at 10 times trailing 12-month sales. That's already up about double from lows earlier this year, and the stock is up more than 50% in 2023.
At this valuation, I am still recommending it as a buy. But as the price and valuation creep up, don't miss the chance to buy before it becomes more expensive.
What does Nu do?
Nu is a Brazil-based digital bank that offers affordable financial products on its app. It's been growing like a weed, and that continued in the 2023 first quarter.
Customer count rose 33% in the most recent quarter from a year ago, to 79.1 million, which is 4.5 million more than the prior quarter. It now has 46% of the adult population in Brazil as customers, and it has entered new markets that are growing even faster. In Mexico, customer count increased 52% over last year to 3.2 million, and customers in Colombia reached 635,000, a 200% increase from last year.
The reason Nu looks like a no-brainer buy right now is because it's still posting incredibly high revenue growth while demonstrating sustained profitability. Revenue rose 87% over last year in the quarter to $1.6 billion, and Nu posted its third consecutive quarter of net income at $141.8 million.
Image source: Nu Holdings.
The market opportunity is vast
While Nu is posting these impressive rates, its market opportunity remains underpenetrated. Consider how much more market share remains in its three countries of operation, which account for almost two-thirds of the Latin American population.
Image source: Nu Holdings.
It also has a fraction of the available market share for many of its products. Nu's strategy is to capture customers and then cross-sell new products, increasing average revenue per active customer and overall revenue. It has less than 3% of the market for personal credit products, 11% for credit cards, and less than 1% for insurance products.
Buffett's holding on to this bank stock
Nu's banking performance was excellent in the first quarter, too. Deposits increased 34% over last year to $15.8 billion, and loan volume increased 54% to $12.8 billion. The cost of funding declined from last year, remaining low as compared with the previous quarter. The net interest margin, or the spread between what it pays depositors and what it earns on assets such as loans, widened both sequentially and year over year to 15.7%.
Buffett has been selling quite a few of his bank stock holdings, either closing out positions or trimming others. He didn't buy more Nu stock in Q1, but he's holding on to the current position.
Nu's stock is climbing, and its valuation is getting steeper. It still looks cheap enough to buy, considering its excellent performance and despite the economic climate, and it has a huge growth opportunity.
