Nu Holdings (NU 1.66%) stock performed exceptionally well last year. After some post-initial public offering (IPO) struggles, share prices for the Brazil-based digital banking platform zoomed from $3.50 to nearly $9 in 2023. With an innovative business model focused on rapid-growth geographies, this is one growth stock no investor should ignore.
Banking on crypto and more
At first glance, Nu is a bank stock, but the truth is far more exciting than that.
Well-known venture capital firm Sequoia Capital has backed thousands of start-ups, many of which grew into iconic brands. Its long list of successful investments includes Apple, Alphabet's Google and YouTube, PayPal, Meta Platform's Instagram and WhatsApp, Airbnb, and Dropbox. Paying attention to what Sequoia Capital is doing has been a reliable way to generate exceptional long-term returns.
In 2012, the firm sent David Vélez to Latin America. His goal was to uncover hidden gems capable of massive growth. He found one opportunity so exciting that he created his own company to take advantage of it. That company was Nu Holdings.
The opportunity Vélez identified was that only a handful of big banks controlled most financial markets in Latin America, charging excessive fees for basic financial products. After raising $14.3 million from Sequoia Capital, Nu aggressively expanded throughout Latin America, first launching a simple and affordable debit card and later expanding into innovative digital-first products, including the ability to buy and transact in various cryptocurrencies.
Within four years, Nu became a venture capital unicorn with a valuation exceeding $1 billion. On Dec. 8, 2021, the company went public, raising $2.6 billion with great fanfare. The market loved the investment thesis: a digital-first bank with exposure to crypto and focused on tapping a huge unmet need in a region of the world experiencing rapid population growth.
What wasn't there to love? Well, the IPO valuation, for starters. The year after shares went public, the stock lost nearly 70% of its value. Two years later, shares still haven't reached their former highs. This could finally be your chance to own a stock that should grow rapidly for years, even decades to come.
NU Revenue (TTM) data by YCharts. TTM = trailing 12 months. PS = price to sales.
Nu stock is a potential rocket
The first thing to know is that Nu's post-IPO stock slump had nothing to do with business performance. Revenue continued to surge higher, driven by a rising customer count that has grown every quarter since the company's founding. Customer count grew by almost 50% last year, with nearly 40% of all Brazilian adults having an account.
Launches in new markets like Mexico and Columbia have also contributed to continued growth, with customers using Nu credit cards, taking out Nu personal loans, and using the Nu app to buy, sell, and transact in crypto.
Nu's post-IPO slump had everything to do with valuation. On a price-to-sales basis, the valuation has since fallen by around 80%, all while the rest of the business remains on a hyper-growth trajectory. To be sure, paying 9.5 times sales is still pricey for a $50 billion company, but there's reason to believe the up-front price tag is well worth paying.
Nu has taken the Latin American market by storm in less than a decade, building arguably the industry's most respected brand. Even after several launches, the company still only covers around 60% of the region's gross domestic product (GDP). Plus, with a digital-first approach, it can cross-sell additional products to existing customers significantly more easily than the competition. For example, in 2017, first-time Nu customers nearly always started with using just one of its products. Today, the average new customer starts with three products.
Customers are using more Nu products more often and at greater rates than ever before. With a huge untapped market to go, including several new countries, Nu has created a high-growth formula that can be repeated again and again. Already, there should be baked-in growth even without new customer additions. That's because the longer a customer stays with Nu, the greater the expected revenue. For example, the average monthly revenue from a customer who has been with Nu for 65 months is around $24. For newer users, say a customer that has only been with Nu for around 5 months, the average monthly revenue is just $3. Over the next 60 months, Nu should be able to boost the revenue of those early users more than seven times in value, a reliable growth tailwind separate from any new customer additions.
Don't let the current valuation multiple fool you. On a forward basis -- that is, what Nu is expected to generate next year -- shares trade somewhere between 3 and 4 times sales. A few years from now, today's valuation could ultimately be below 1 times sales. This looks like the makings of a forever stock. Patient investors should be rewarded.
