The Brazilian digital bank Nu Holdings (NU 0.09%) has been rolling, and its stock is now up more than 83% this year. The company had another strong quarter recently, generating record revenue of more than $1.6 billion and turning in its third consecutive quarter of profitability, with net income jumping to almost $142 million for the quarter.
After this big rally, there's no beating around the bush: The fintech stock is expensive, trading at more than 42 times forward earnings, with nearly a $31 billion market cap. The valuation is undeniably high, but here's why I can live with it.
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It's only beginning to fully penetrate its customer base
Nu got its start by offering a credit card with no annual fees through a sleek digital banking experience. The company has rolled out a lot of other banking products with lower fees, which has helped it capture more than 79 million customers, or 46% of the Brazilian adult population.
While it's hard to imagine Nu keeping up this growth forever, it still hasn't penetrated -- and therefore really monetized -- much of its client base with some of its most profitable products. For instance, Nu's market share in unsecured personal credit is only 3%; its credit card market share is less than 11%; and its market share in investments and insurance is less than 1%.
You can also see this in Nu's monthly average revenue per active customer (ARPAC), which was only $8.60 across the company in the first quarter of 2023. Some of Nu's more mature cohorts have monthly ARPACs of $24. Also, Nu's customers who use its bank account, credit card, and personal loans have monthly ARPACs of around $30.
While Nu has huge market share in Brazil, the company is only a few years old in its expansion markets Colombia and Mexico; it's acquired far few customers in these countries. However, CEO David Velez said: "The experience we're having in Mexico and in Colombia is more positive than what we saw in Brazil in the first few years. With three years of operations in Brazil, we had 1.2 million customers, representing a penetration of less than 1% of the adult population of the country at that time." Nu is already ahead of this pace in Mexico, where it has acquired more than 3 million customers.
It remains to be seen whether Nu can replicate its success in Brazil in these countries, but I wouldn't rule it out. Furthermore, Nu is rolling out more products, such as payroll loans. It also has more than 2.3 million small- and medium-sized customers that Velez acknowledges the company hasn't paid as much attention to as it probably should, but Nu is planning to ramp up product offerings for this segment.
Finally, Nu is starting to see progress with high-income customers, who are typically very profitable for banks. Roughly six of every 10 high-income consumers in Brazil now bank with Nu; these customers are giving it high marks on customer satisfaction. They're also starting to use Nu products more, and viewing the bank as one they would use regularly.
Plenty of runway
Nu's valuation is by no means cheap. But it's easy to see why the market is giving it such a high valuation -- because of its growth potential. Nu has also managed to scale quite efficiently, maintaining a low cost to serve customers. If it can continue to do this as it grows, then profitability should really ramp up.
In my mind, Nu is not a stock that will double overnight, but it's one that you should hold for at least five to 10 years. Despite the tremendous growth the company has already achieved, there's still potential for massive growth ahead.
