While it's always best to buy stocks at the lowest price you can, you can't time the market, which means even the best investors rarely buy stocks at the bottom. So your goal shouldn't be to find the cheapest prices, because that could present several problems. Missing great stocks at good prices and falling into value traps are two that come to mind.
Instead, focus on finding great stocks at valuations that still imply growth. Warren Buffett says, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." That's coming from the king of value investing, in which low prices are key. But low prices aren't worth much if the companies behind them aren't going anywhere.
It's not surprising, then, that Buffett's been backing fintech company Nu Holdings (NU 1.66%), even though it's not your typical Buffett stock. It's already up almost 90% in 2023, but it's not too late to buy. Here's why.
Revenue is climbing
Nu has been exploding, and there's no indication that it's slowing down. Revenue increased 87% year over year, to $1.6 billion, in the first quarter of 2023, and the company has been building up its business to generate higher sales for the foreseeable future.
Nu operates through Nubank in its headquarters in Brazil as well as in Mexico and Colombia, markets it has entered only recently. Its core business is bank accounts and personal loans at affordable rates, but it's making strides in other financial services such as credit cards and investing.
These are essentially the three ways it can grow.
- Entering new markets. Right now, Mexico and Colombia are tiny pieces of the pie, but they're growing incredibly fast. Nu already counts 46% of the adult population in Brazil as customers, which leaves it plenty of room to grow, albeit at slower rates. It has 3% of the market of Mexico, where it has been in operation for three years, and 2% of the market in Colombia, where it has been operating for two years.
- Increasing customer count. Overall customer count increased 33% year over year in the first quarter. In Mexico, it grew 52%, and in Colombia, 200%. That should keep climbing as new customers catch on to Nu's affordable and digital services.
- Cross-selling and upselling new products per customer, which is an integral element of the model. Average revenue per active customer (ARPAC) is one of Nu's key metrics, and it's been steadily increasing as customers adopt more products.
Image source: Nu Holdings.
Turning sales into profits
Another thing to note about the chart above is that as ARPAC increases, the cost to serve doesn't. That's incredible efficiency, and it's leading to profitability. Nu posted $142 million in net income in the first quarter, its third consecutive profitable quarter.
It boasts similar efficiency in the banking segment, where the cost of funding has substantially decreased.
Image source: Nu Holdings.
Valuation is still compelling
At the current price, Nu shares trade at 10 times trailing-12-month sales. That's up from earlier lows but down from a sky-high valuation when it first came on the market.
You can't call this stock cheap. However, as Buffett might say, it's still a wonderful business at a fair price. I say it's fair because the company is clearly in its early innings, and revenue growth remains elevated even as Nu demonstrates sustained profitability. There are many reasons to expect the stock to keep rising, and that's worth a premium.
