Warren Buffett is known to love bank stocks, but he picks his banks carefully. Bank of America is a longtime holding, although he sold some recently, and he picked up shares of Capital One Financial for the first time this year. Last year he sold out his position in Wells Fargo. And American Express, which has expanded its banking services of late, is one of his largest and longest-held positions.
Nu Holdings (NU 1.66%) is one of Buffett's more curious positions, because it was unprofitable when Berkshire Hathaway invested in it back before it was even a public company, and it sports a premium valuation. But it is a bank stock, with the features that Buffett likes.
Today, it has become net profitable for several quarters, while still pumping out high growth rates and increasing popularity. It's still expensive, but there are many signs of lasting value. The number that stood out among many in another incredible earnings report in the 2023 second quarter was Nu Holdings' increase in average revenue per active customer (ARPAC), and this is the key to why there's so much to be confident about for its future.
How Nu is conquering its market
Nu got its start a little more than 10 years ago as a digital bank start-up. It serves three Latin American markets and is now the largest digital bank globally.
There are a few ways Nu differentiates itself. It charges low fees, it's completely digital, and it's aiming to offer a full suite of financial services all in one place. Underlying this is a mission to be consumer-centric, and this guides how it develops and presents its products.
Nu now offers bank accounts, loans, insurance, credit cards, and investment products. Part of its strategy is to upsell and cross-sell products, leading to high consumer engagement, increasing revenue, scaling, and profitability.
Underpinning this strategy is ARPAC, which is the metric that lets shareholders know how the company is faring.
Why ARPAC is so important
ARPAC measures how much revenue Nu gets from every customer on average. If the strategy is working, this number should be consistently improving. And it is.
Image source: Nu Holdings.
ARPAC surpassed $9 for the first time in the 2023 second quarter, increasing 18% over last year and also increasing sequentially. Usually a company recruits new customers, and because newer customers typically purchase fewer or cheaper products, it brings down numbers like ARPAC. But Nu's ARPAC is increasing even as new customers soar; it added 4.6 million in the second quarter and 28% over last year.
This could mean a few things, all positive: New customers are buying more expensive products, or they're signing up for several products at once, or the increase in upsells from existing customers outweighs the cost impact of new customers. All of this points to the likelihood of staying power and continued increasing revenue.
A part two of Nu's ARPAC is its cost to service customers. Another assumption you might make is that as products increase, the cost to Nu to service customers with these products increases along with it. But that's not happening. Nu's service cost is remaining stable at $0.80 on average.
Image source: Nu Holdings.
That has helped Nu to reach net profitability, and also indicates that the profits should be sustainable and increasing.
Nu stock has a huge growth runway
Although Nu already has nearly half of the market in its home market of Brazil, it still has another half to go. It has a tiny presence in its newer markets of Mexico and Colombia, both of which are fast-growing.
Nu is demonstrating that it can be efficient and profitable at scale, and its products are resonating with customers.
The only thing that might hold back investors right now is the valuation. Nu stock trades at a price-to-sales ratio of more than 8. That's a premium valuation, but it's not astronomical, especially considering Nu's performance and opportunity.
Keep watching how Nu's ARPAC fares. But even now, Nu is a top growth stock to buy.
