Shares of Nu Holdings (NU 1.66%) have been on fire, up almost 150% during the past year. Many U.S. investors haven't had the opportunity to engage with its products, since it largely operates in Brazil. But if you have an appreciation for Warren Buffett stocks, it's worth getting to know Nu.
Let's see why its stock is up and where it might be three years from now.
Growing revenue from two sides
Nu is an all-digital bank operating as Nubank. It is based in Brazil and also serves Mexico and Colombia, its two newer markets. It added 19 million new accounts in 2023 and ended the year with almost 94 million, which includes 53% of the adult population of Brazil.
But it's not just new customers who are leading to higher revenue. Nubank has expanded to offer a broad suite of financial products beyond bank accounts, such as credit cards and investing tools, and it upsells and cross-sells new products.
User engagement is high, at an 83% rate. That leads to increased average revenue per active customer, which has been growing consecutively and year over year along with overall revenue.
Image source: Nu Holdings.
In three years, Nubank is likely to have millions more customers as it makes headway in Mexico and Colombia. It might even have entered a new market. Revenue should be consistently growing at double-digit percentage rates, although it might be slow as it scales up.
High growth means bigger profits
Revenue is growing fast, but Nubank has been able to keep its costs in check. That also has to do with its upselling strategy: It doesn't need to spend more to increase revenue once it wows existing customers. It's also drawing in more deposits to make loans, yielding more net interest income.
Cost to serve (a measure of how much the company spends to serve the average user) has remained stable from last year at $0.90, while the cost to fund deposits was relatively low at 80% of the interbank interest rate.
Net interest income increased 85% year over year in the 2023 fourth quarter, and its net interest margin was 18.3%, close to its highs.
Gross profit increased 87% from 2022, and gross margin expanded to 47.5%. That drove net income higher, increasing to $361 million in the fourth quarter from $58 million the year before.
The Warren Buffett growth stock
Nu identified three goals heading into 2023: scaling up the lending business in Brazil, increasing engagement in the Brazilian upmarket segment, and increasing local currency deposits in Mexico and Colombia.
It doubled personal loans in 2023, meeting the first goal. As it attracts more deposits, these pave the way for an all-over bigger business with increased net interest income and lending products, plus long-term engagement with these customers.
As for the second goal, Nubank began as an alternative to bigger traditional banks in what was a traditionally underbanked region. Its low-fee products are attractive to a mass audience, but it has caught the attention of a wider market looking for easy-to-use digital financial services, and the company is increasing its hold on a more-affluent demographic. Volume on its Ultraviolet credit card, geared to that audience, more than doubled year over year in the 2023 fourth quarter.
For the third goal, it launched a deposit account in Mexico last May, and within two months quadrupled its deposits to more than $1 billion -- three times faster than it achieved that feat in Brazil. It only got regulatory approval for the same product in Colombia in December, and it launched it in January.
It's safe to say that growth in Brazil is far from over, and it's just getting started in Mexico and Colombia. That makes Nu Holdings an atypical Buffett stock, since Buffett is known to embrace value and stay away from growth. The company's model must look extremely compelling to him and his team as a secure pick despite its youth and high growth.
Nu Holdings stock doubled last year, and it's well on its way to achieving that again in 2024. I wouldn't be surprised if that continues for the next three years. In any case, it's likely to outperform the market and reward shareholders.
