The stock market made a significant comeback in 2023, gaining 24%. But with the positive market sentiment, many stocks gained much more than that. Nu Holdings (NU +1.07%), which is part of the Berkshire Hathaway equity portfolio, gained 105% last year. Can it do a repeat in 2024?
Why Nu outperformed last year
Nu has many features that appeal to both clients and investors. It's an all-digital bank that provides a suite of low-fee financial services to its customers in Brazil, Mexico, and Colombia. The concept is catching on, and Nu is recruiting customers at a rapid pace. It added 5.4 million customers in the 2023 third quarter, and it now has more than half of the adult population in Brazil on its platform. Lest you think that amounts to saturation, it added as many as 1.5 million customers monthly in Brazil in the quarter, and it has a healthy base from which to onboard more. It has expanded into regions where it still has low penetration -- only 3% in Mexico and 2% in Colombia as of early 2023, so the market is still wide open. It will probably enter other regions in the future.
On top of that, it's been successful with its strategy of cross-selling and upselling new products to existing customers. It measures that with average revenue per active customer (ARPAC), which increased 18% over last year in the third quarter to $10.
Why it could double again
Nu was a typical unprofitable growth stock for a while, but as it has scaled, it has delivered two consecutive quarters of net profit, and both represented increases.
NU Net Income (Quarterly) data by YCharts
Its cost to serve has remained relatively stable. Management says that underscores its operating leverage, and Nu is turning into a superstar fintech company that combines high-tech digital solutions with the cash-generation abilities of a traditional bank. That creates high growth along with stability and long-term viability.
Image source: Nu Holdings.
It had an incredible 2023 despite rising inflation and high interest rates, macro forces that typically hurt banks. Even its credit business, which would be the most vulnerable part of the business, demonstrated solid performance. Deposits increased 26% over last year in the third quarter, and that's not surprising because consumers are fishing around for better rates in this climate. But loans were up as well, and net interest margin was at an all-time high of 18.8% in the third quarter. That reflects excellent operational management.
Inflation is moderating in the U.S. and Brazil, and the Federal Reserve said it might cut interest rates this year. Other countries are likely to follow suit, and lower interest rates should lead to even better performance for Nu.
Don't miss Nu stock as it climbs higher
Can Nu stock double again this year? Absolutely. Its business is thriving, and conditions should work more in its favor in 2024.
At the current price, Nu stock trades at a forward price-to-earnings ratio of 25, which looks reasonable given the company's performance and opportunities. If it continues to report the kind of growth and rising profitability that it did in 2023, you should expect the stock to rise still more. It might even do better this year than last year.
