Investors have started the year on a high note, with the S&P 500 hitting all-time highs and officially ending the bear market. Bull market conditions usually lead to market enthusiasm and increasing prices. However, many investors were hit hard when the last bull market ended, and many growth stocks tanked. They've spent the past two years or so learning their lesson; now is the time to put those lessons into action and make careful, deliberate investing decisions.
There's no better place to look for sensible investing ideas than the Berkshire Hathaway portfolio. And it might be refreshing to see that Warren Buffett and his team, who are known for their value picks, have a few top growth stocks as well. Nu Holdings (NU 1.66%) is a digital bank that's taken its market by storm and won't be letting up anytime soon. Investors should consider buying Nu stock hand over fist this year. Here's why.
Gaining a foothold in Latin America
Nu operates under the banner NuBank in Brazil and, more recently, Mexico and Colombia. It's an all-digital bank that has expanded into a full financial services app, and it's growing rapidly.
Revenue increased 53% year over year in the 2023 third quarter, and it added 5.4 million customers for a total of 89.1 million. Growth is still robust in its core market of Brazil, which has the largest population of any Latin American country. In the third quarter, Nu's membership topped half of the country's adult population, but it's far from finished. In its newer markets, it's growing even faster, but it still has a fraction of the total market. It's focused on these markets right now, but I wouldn't be surprised if, at some point, Nu enters other Latin American markets.
On top of increasing membership, it's growing revenue through cross-sells and upsells. Customers are attracted to Nu's low fees and easy-to-use interface, and satisfied customers are signing up for more and higher-priced services. Some of Nu's products include bank accounts, credit cards, insurance, and lending products.
One of Nu's important metrics is average revenue per active user (ARPAC), which measures how much money it's making from each customer. With millions of new customers every quarter, you might think this number would decrease. However, these customers are engaging, and the activity rate increased from 81.6% to 82.8% this year. This is driving up ARPAC, which reached $10 in the third quarter.
Image source: Nu Holdings.
This is leading to economies of scale, and Nu is demonstrating improving profitability. Cost to serve has remained stable, at $0.80 to $0.90 during the past five quarters. Gross margin widened from 32.7% last year to 42.8% this year, and net income rose by more than 400%.
Why does Buffett own Nu?
By most standards, Nu is far from a typical Buffett stock. It's only recently become profitable, and there's risk in investing in Latin American financial stocks. Brazil's inflation rate was above 10% in 2021, and interest rates topped out at 12.75%, although they're now down a point.
But Buffett loves bank stocks. Bank of America (BAC -0.21%) is Berkshire Hathaway's second-largest position, accounting for 9.2% of its equity holdings, and he owns a few more. The typical Buffett bank stock is stable and established, with a strong consumer brand, a dividend, and lots of cash. Nu is establishing its brand and resonating with customers, and it's the largest digital bank in the world by assets, according to Statista.
As Brazil gets its economy under control and Nu captures a greater market share in all of its markets, it could soar in 2024 and beyond.
