The fintech market is filled with myriad companies and technologies. Whether it's buy now pay later products or one-stop shop digital neo-banks, people have virtually no shortage of solutions. But the rising competition can make assessing these companies as potential investments an arduous task.
When I analyze a specific market, I like to look at how large institutional investors may be involved. For fintech, one of the best investors to study is Berkshire Hathaway founder and CEO Warren Buffett.
Buffett has been a longtime owner of payment companies Visa, Mastercard, and American Express. While these are some of the largest blue chip names in financial services, the Oracle of Omaha also owns some lesser-known fintechs, such as Nu Holdings (NU 1.66%).
Let's take a look at Nu's business and assess what might be driving Buffett's interest in the company.
Latin America is a hotspot for fintech
When it comes to banking, not all countries operate on the same playing field. Many countries outside the United States and Western Europe have large underbanked or unbanked populations. That means basic financial services, such as obtaining a loan, or making peer-to-peer payments, are not easily feasible. Several countries in Latin and South America have substantial unbanked populations. While this presents a lot of operational and regulatory challenges, several companies in these regions appear to be laying the foundation for a better future of commerce.
Nu Holdings is headquartered in Brazil and clearly has decided to penetrate its native market before expanding to other geographies. Per the company's latest financial report, Nu has acquired 79.4 million customers in Brazil as of June 30. This represents 49% of the country's adult population. On a global level, Nu grew its customer base by 28% year over year, reaching 83.7 million by the end of the second quarter. According to company-cited statistics, this makes Nu the fifth largest financial institution in Latin America by customer count.
This level of growth underscores how much demand Nu and its competition are witnessing. While it's encouraging to see such robust growth in its customer base, let's dig into the company's financial profile to assess how it's performing.
Image source: Getty Images.
What makes this company special?
For the quarter ended June 30, Nu increased revenue 60% year over year to $1.9 billion. This represented an all-time record quarter, and 5 times growth in just a two-year period. How is this even possible?
Well, as pointed out above, Nu is adding loads of customers onto its platform. Moreover, one of the company's most important metrics is Average Revenue per Active Customer (ARPAC). In Q2, ARPAC reached $9.30 and grew 18% annually. Furthermore, Nu is the primary bank for 58% of active customers of at least one year. Given the increased engagement on its platform, combined with consistent customer acquisition, Nu is experiencing the exponential effects of compounding business.
The compounding effects are not just translating to top-line growth, though. During the second quarter, Nu posted net income of $225 million. In contrast, the company lost nearly $30 million in the same period last year.
Given the accelerating top-line growth and robust earnings potential, it's becoming more clear why Buffett is such a fan of the company.
Should you own the stock?
Buffett tends to be a value investor looking for mispriced opportunities in the market. One useful way to identify good value stocks is by taking a look at historical price-to-earnings (P/E) ratios.
NU PE Ratio data by YCharts.
Given that the company was unprofitable until the second half of 2022, there isn't much of an earnings history to go by. Nonetheless, the company has consistently been increasing net income since third-quarter 2022. And yet, per the chart above, Nu stock is trading almost 14% off its P/E high.
I think the company's progress demonstrates that its products are in demand and are being heavily utilized. Additionally, targeting underbanked regions has been a successful go-to-market strategy so far. Nu's revenue and profit growth are especially impressive when you consider that most of its user base is in just one country, and that it's competing with several other fintech platforms.
Should a new bull market be on the horizon, tech-enabled services such as Nu should experience some new life. It is possible that during a bull market, more people will be conducting business (and spending money), and utilizing the services of banks. As more customers join the platform and leverage Nu's ecosystem of products, the company should enjoy further compounded growth. Given the rising profits, sticky user base, and the prospects of a bull market, I am inclined to think Nu is an attractive buy at its current valuation.
