Fintech is making a comeback this year. It was one of the worst casualties of the bear market last year, since it's a growth industry with a tech orientation, and those were some of the hardest-hit stocks when the market tanked. But it's now leading the market's rise in 2023.
For example, Cathie Wood's ARK Fintech Innovation exchange-traded fund (ETF) is still down more than 30% over the past three years, but it's up 64% so far this year.
Nu Holdings (NU 1.66%) is a Brazil-based fintech that's catching on and gaining members. It sells low-cost services in a digital, easy-to-use format, and its stock is on fire, up 90% so far this year.
Is it still a buy?
When you give customers a good product, they buy it
The premise behind Nu's incredible success is providing products that customers love.
Nu is a bank that has branched out into other financial services, but it has some key differentiating qualities that help it stand out.
Brazil has historically been dominated by a small number of large banks, and smaller outfits have struggled to make inroads into its financial system. Nu has emerged as a different kind of operator. It's completely online, it offers many services all under one account, and it charges low fees.
It's been around for nine years in Brazil and counts 46% of the adult population in that market as customers. It entered Mexico three years ago and has 3% of that population, and it entered Colombia two years ago and has 2% of that population. At the end of the 2023 first quarter, Nu had 79.1 million customers, a 33% year-over-year increase.
Part of Nu's model is to hook customers with low-priced products and upsell and cross-sell new products and services. This is going fantastically well, as is well illustrated in its increasing average revenue per active customer (ARPAC).
Image source: Nu Holdings.
The activity rate was 82% in the first quarter, which means that customers are highly engaged with the company. (The activity rate measures the percentage of customers who generate revenue over a 30-day period.) That bodes well for creating loyalty and continued strong results.
When you do it well, you make money
The premise behind Nu's incredible performance is that it has been able to convert sales into profits.
It continues to post exceptional growth while building up the bottom line, which is the mark of a great company. In the 2023 first quarter, net income was $141 million after a $45 million loss last year.
In the above chart, you can see that its cost to serve remains constant despite the increase in services and customers, leading to increasing revenue without increasing costs.
In its banking segment, both net interest income and net interest margin have expanded sequentially for the past five consecutive quarters.
Image source: Nu Holdings. US$MM = millions of U.S. dollars.
There's massive growth potential
Nu sees a $1 trillion market opportunity, and there's significant potential for organic growth as customers opt for more services. So while there's plenty of growth in new customer sign-ups, there's also lots of opportunity to generate revenue from existing customers.
At the current price, Nu stock trades at 10 times trailing-12-month sales. That's pretty high, but it could be reasonable for a company demonstrating this kind of growth and opportunity.
Investors could wait for a dip to buy this stock, but you can't time the market, and Nu is an excellent stock to buy at any time.
