Investors could do far worse than following Warren Buffett's stock picks. He's famous for his long-term approach, investing in iconic businesses long before they became household names. These days, he's not the only one managing Berkshire Hathaway's portfolio, but you can bet that the rest of his team shares the same investing philosophy.
That's why it's notable that Berkshire currently owns around 107 million shares of Nu Holdings (NU -0.43%) worth roughly $900 million. Berkshire has owned stock in the Latin American digital bank since its initial public offering (IPO) in December of 2021. When shares tanked over the first few months of trading, losing two-thirds of their value, Berkshire didn't sell a single share.
Following these lows, the share price tripled, and still Berkshire isn't selling. It's very likely the firm is a believer in Nu's long-term promise. Let's see what could be some of the reasons.
As a digital-first bank, Nu has a clear competitive edge over other Latin America banks, the region of the world in which Nu operates. Incumbent banks have proven slow in the adoption of technology. That slowness was fueled by industry consolidation. With many markets controlled by only a handful of players, there wasn't much incentive for the bigger players to innovate.
Nu was founded in 2013 specifically to shake things up. The bank didn't operate through physical branches but through a smartphone app. Instantly, anyone with a smartphone could become a customer. Nu's thesis -- that there was massive demand for cheaper, more accessible financial services throughout Latin America -- turned out to be spot on. In its first decade of operation, the bank went from zero customers to more than 95 million. In the past year alone, Nu has added 19 million new customers.
When Nu enters a country, demand for its services can be overwhelming. In Brazil, for example, more than half of all adults are Nu customers. More recently, Nu has entered the Mexican and Colombian markets, but there's a lot of growth runway left in these countries, not to mention the rest of Latin America which boasts more than 650 million people.
Warren Buffett isn't the only one who bought into Nu's long-term potential. Sequoia Capital is one of the most venerable venture capital firms in the world. Several of its partners are billionaires. Not only is Sequoia an investor in Nu, but it provided the bank with its original start-up capital.
There's a lot of smart money betting on Nu. That's the first reason you should be interested in Nu stock. The long-term thesis is also sound. There's little reason to believe Nu can't replicate its historical success for years to come. But before you dive in, there's one risk you should be aware of first.
Nu shareholders must keep this one thing in mind
Nu has established itself as one of Latin America's fastest-growing financial institutions. It has a blueprint for success that should be repeatable across many other markets. These factors have resulted in a pricey valuation. Shares currently trade at 8.2 times book value. Wells Fargo, for comparison, trades at just 1.3 times book value.
Of course, Nu's growth potential is far greater than Wells Fargo, but stocks with pricey valuation multiples tend to be more volatile. Any small shift in growth expectations can have a sizable effect on the stock price. This is exactly what happened after Nu's IPO when shares sank by more than 60%.
Volatility shouldn't preclude you from investing in Nu. In fact, volatility can be a long-term investors best friend, allowing you to capitalize on short-term pullbacks. But if you want to maximize your profit with Nu stock, it's best to invest like Buffett; only buy with the intention of holding for years, if not decades.
