Few stocks are able to double in value over a single year, yet that's exactly what Nu Holdings (NU 0.67%) did in 2023 when shares zoomed from $3.50 to more than $8. The run may not be over. Nu stock was recently listed as one of Morgan Stanley's favorite stocks of 2024, with 95% potential upside based on analyst projections.
Nu stock has proven it can grow rapidly over short periods of time, but is there really another 95% in upside this year?
NYSE: NU
Key Data Points
It's not hard to be bullish
There are a lot of reasons to love Nu stock. The most obvious is that the company operates a high-quality business model within a high-growth industry.
Founded in 2013, Nu was designed from the start to disrupt stodgy, old-school incumbent banks across Latin America. Founder David Vélez had previously worked in venture capital, covering Latin America. What he noticed in his venture capital years was that the Latin American banking sector is highly consolidated, controlled by a handful of banks that charge customers relatively high fees for simple services. Vélez founded Nu to shake things up.
With a digital-first approach, Nu began offering low-cost, easy-to-access forms of banking and credit. The company didn't need people to visit a physical branch or navigate complicated paperwork. Anyone could sign up for an account instantly via their smartphone. Since 2013, Nu has provided more than 5 million people with their first credit card or bank account.
The truly great thing about Nu's business is that it's built around delivering an ever-greater number of products and services to its customer base, many of whom have never had much access to the traditional banking sector. Customers who began with the company in 2017, for example, typically started using only one Nu product, say a credit card or a bank account. After four years, however, those customers were using an average of four Nu products. They might have a credit card and a bank account, but also a crypto trading account and a personal loan, all delivered to them through a few clicks on their smartphone.
Today, Nu has a presence in several Latin American countries, including Brazil, Mexico, and Colombia. There are still millions of additional customers within these countries, plus millions more in countries Nu has yet to enter. With such a disruptive business model, it's easy to understand how the company's revenue has more than quadrupled since going public in 2021. With plenty of customers yet to tap, it is also easy to understand why analysts think this rapid growth will continue.
Pay attention to the price
Few investors are bearish about Nu's prospects as a business, but analyzing the stock is a different matter. As Warren Buffett is fond of saying, investment returns are a direct function of the price you pay. It is, after all, possible to pay too much for an otherwise fantastic business.
Analysts at Morgan Stanley clearly seem comfortable with the current valuation, otherwise they would not see 95% in potential upside. The reasons for their bullishness should already be clear: They believe Nu will see rapid growth from cross-selling its products to existing customers, as well as by replicating its business model in adjacent countries with similar market dynamics.
But what about the valuation? Despite revenue quadrupling since the company's initial public offering (IPO), shares trade at a lower price today than they did back then. The reason for this mismatch is simple: Nu stock was overvalued at previous prices, with all of the growth already priced in. Is that still the case today?
There's no doubt that Nu's valuation has come down since its IPO, even after the stock doubled in value in 2023. At the start of 2022, shares were priced at more than 40 times sales. One year later, that valuation crashed to just 6 times sales. Today, the stock trades at 9.5 times sales. Is that an attractive entry point? It depends on your time horizon.
As Nu's recent history shows, the valuation of high-growth stocks can gyrate wildly over the short term. Over the long run, however, consistent growth can make high valuation multiples look cheap. Consider Visa, another popular fintech stock. In 2010, shares traded at roughly the same valuation multiple that Nu trades at today, around 10 times sales. That's a pricey valuation, to be sure, but over the next 14 years, the stock value increased by more than 1,800%. There were some big downward slumps along the way, but patient investors stack the odds in their favor when targeting businesses like Nu or Visa, which can compound high growth rates for decades at a time.
Will Nu stock rise 95% in 2024? No one can know for sure, but this looks like a great pick for patient investors looking for big-time growth.
