Fintech stocks have made -- and erased -- small fortunes for many investors in recent years.
In 2020, many of these stocks doubled or tripled in value. Some saw their market caps soar by 1,000%. Those sudden rises were followed by dramatic falls, as many fintech stocks gave back all those gains.
This looks like a fantastic time to buy certain fintech stocks -- prominent among them, Nu Holdings (NU 1.66%). While it's not as cheap as some of the other options out there, it is, in my view, arguably the best place to invest $1,000 right now. During the coming years, its shares have tremendous upside potential as the company executes on its growth plans.
Trust high-quality businesses like this
Fintech businesses are exactly what they sound like: They combine financial services with technology. When they're managed right and offer compelling services, these businesses can grow rapidly for years, if not decades.
Consider PayPal. When it went public for the first time in early 2002, its services were revolutionary. Users could transfer money across the world in seconds. They could also use PayPal to safely buy and sell products and services online. At the time, relatively few people felt safe entering their credit card numbers into a computer. PayPal took the worry out of online transactions by creating a technological intermediary. If there was a problem with an order, PayPal could provide recourse.
Today, PayPal has more than 400 million active users. That's greater than the population of the U.S. And while its active user base has recently begun to shrink, PayPal enjoyed roughly two decades of consistent user growth. Financial services in general is a big business. When fintech companies like PayPal find ways to disrupt the status quo through clever technology and marketing, investors can generate huge profits.
The most promising fintech stock today is Nu Holdings. This company isn't all promise, either. It has a decade-long track record of success, and it built a multibillion-dollar business from scratch.
Nu was created in 2013 to disrupt Latin America's banking industry. At the time, the financial services market in the region was controlled by a handful of powerful players. These incumbents had no reason to rock the boat. They charged high premiums for simple services and earned reliable profits along the way without needing to invest in innovation.
Nu flipped everything on its head by forgoing physical branches, offering its services directly to anyone with a smartphone. As Doug Leone -- a partner at Sequoia Capital, an early investor in Nu -- explained, "At first, the competition failed to take Nubank seriously; they didn't understand the deep technological work involved in the backend of the deceptively simple user experience, and thought the company was nothing more than an app."
After going from zero customers in 2013 to 95 million today, Nu is clearly more than an app. Its customers not only turn to Nu for credit and debit cards, but also for insurance, personal loans, checking and savings accounts, and even crypto investing. None of the incumbent banks in its markets have come even close to replicating Nu's business model. The company now has technological and reputational advantages that its competitors will find difficult to match for years to come.
When it comes to high-quality businesses with durable competitive advantages, Nu is a prime case study.
Two ways to win
Building off a strong foundation, Nu has two promising pillars of growth that should deliver healthy returns to shareholders during the next decade and beyond.
The first pillar of growth will be replicating its business model in new markets. Initially focused on Brazil, Nu expanded into Mexico and Columbia, where it experienced similar success. In its first seven months operating in Mexico, for example, Nu amassed deposits of more than $1 billion. Simply by expanding into nearby countries like Peru, Argentina, Ecuador, and Chile, Nu can increase its potential customer base by up to 100 million people.
The second pillar of growth for Nu will involve delivering more products and services to existing customers. To track its success in doing so, the company monitors and publishes its average revenue per active customer (ARPAC). Since its founding, that metric has increased nearly every quarter. That's due to two factors. First, it has launched new financial services like insurance and personal loans. Because Nu's services are accessible via smartphone, new products become immediately available for adoption across its entire user base. Second, the company has gradually acquired a positive reputation, and thus is enjoying stronger engagement from its users. Customers who join Nu today are significantly more likely to use their Nu account as their primary bank account than users who joined in the past.
Source: Nu Investor Presentation, Page 11
Now valued at nearly 10 times sales, Nu stock is certainly not cheap. But the story here is as good as it gets -- a reputable company with a track record of success and multiple ways to continue its growth trajectory. Fintech stocks are notorious for their high growth potential, and Nu stock appears like the best fintech stock to invest $1,000 in today.
