Growth investors are always looking for smaller companies that could mimic the long-term gains achieved by stocks like Amazon or Tesla. However, such endeavors are tricky, as even the most promising growth stories can get derailed by unforeseen circumstances, especially in the early stages.
One way to mitigate this issue is to find smaller large-caps with rapid growth, especially those with a positive net income. While that strategy is not a guarantee, Sea Limited (SE 0.05%) and Nu Holdings (NU 1.66%) offer rapid growth, and their depressed stock prices could allow investors to buy in cheaply at current levels.
Sea Limited
Sea Limited is a tech conglomerate that has been facing challenges at its core business, Garena, which develops online games. But the Singapore-based company appears to have finally addressed the issues with this segment.
Garena experienced a 41% annual decline in gaming revenue in the second quarter, in part because its No. 1 mobile game, Free Fire, fell in popularity. This stands in contrast to its e-commerce and financial services segments, which grew revenue at yearly rates of 21% and 53%, respectively, in Q2.
Part of Free Fire's decline involved its ban in the world's most populous country, India, in early 2022. The company has finally responded by developing a version of Free Fire specially tailored to the Indian market.
Sea Limited will make that game available on Sept. 5. Since that will make Free Fire available to 1.4 billion more people, it could help reverse the massive revenue declines that have weighed on both Garena and Sea Limited as a whole.
Despite Garena's challenges, Sea's Q2 revenue of $3.1 billion grew 5% year over year. Moreover, falling costs and expenses allowed Sea to earn a $331 million net income in Q2, up from a $931 million loss in the year-ago quarter.
Now, with Free Fire about to be available again in India, Sea may start to reverse the declines that have weighed on the stock. The stock has fallen more than 55% since May and sells at a 90% discount to its 2021 high.
With that drop, Sea sells for a forward price-to-earnings (P/E) ratio of 17, a low valuation considering the rapid revenue increases in both e-commerce and fintech. If Garena ceases to act as a drag on growth, Sea could finally be positioned to surge toward its 2021 highs and eventually beyond.
Nu Holdings
As a Brazil-based digital bank, NuBank parent Nu Holdings is likely not on the radar of most American investors. Still, it likely deserves their attention as it attracted an early investment from Warren Buffett's Berkshire Hathaway and could help transform finance in Latin America.
Latin America has a huge unbanked population, meaning people who lack access to bank accounts or credit cards. Nu has stood out by addressing this problem directly. In a one-year period, the bank issued the first credit card to more than 5.7 million customers in its native Brazil.
Additionally, it recently expanded into Mexico and Colombia. With 49% of Brazilian adults already holding a Nu account, growth was likely to slow. Mexico and Colombia account for just over 4 million of the bank's 84 million customers, meaning these markets can likely continue driving Nu's rapid growth.
Indeed, growth has defined its recent performance. Its Q2 revenue of $1.9 billion surged 60% higher from year-ago levels. With slower increases in operating expenses, net income was $225 million, up from a $30 million loss in the same quarter of 2022.
Nu stock has pulled back from recent highs. Nonetheless, despite that correction, the fintech stock has risen more than 70% since the beginning of the year. And even with the increase, it sells at a forward P/E ratio of 36. If Nu Holdings can repeat its past success in Mexico and Colombia amid that valuation, it will probably bring its investors massive growth at a low price.
