Thanks to his remarkable track record of allocating capital for many decades at Berkshire Hathaway, Warren Buffett is widely regarded as one of the greatest investors ever. The conglomerate's massive $370 billion portfolio is closely watched as a source of new stock ideas.
One enterprise on the list that investors might not be too familiar with is Nu Holdings (NU 1.59%). The fintech stock has been on an incredible run, soaring 72% in the past 12 months.
Is it time to buy Nu shares for your portfolio?
A top digital bank
What's remarkable is that Nu was founded just over a decade ago in 2013, and it has risen to become a business worth $56 billion today. The company provides various financial services -- like checking and savings accounts, credit cards, and loans -- in Brazil, Mexico, and Colombia.
By seeing an opportunity to disrupt the financial services sector in Latin America, mainly by leaning heavily on its technology to provide a better user experience, Nu is making a huge impact and gaining broad adoption. Management claims this is the largest digital bank outside of Asia.
Buffett likes businesses with an economic moat. In this instance, one could make a valid argument that like most banking operators, Nu Holdings benefits from switching costs. That's because as its customers start using more of the company's products, they are unlikely to switch to a competitor. This can protect its industry position.
NYSE: NU
Key Data Points
Incredible momentum
Even with nearly 100 million customers, a figure that is up roughly fourfold compared to the first quarter of 2020, Nu is still growing like wildfire. The company reported a 69% year-over-year revenue increase in the first quarter (ended March 31) to total $2.7 billion. And during the three-month period, it added 5.4 million net new customers.
Over the long term, management's growth playbook involves adding new customers while boosting the revenue per customer. Cross-selling products is a key strategy here: Someone might sign up first for a checking account and debit card, and then as their financial needs evolve, they could start to invest their savings and even take out personal loans.
It's estimated that a whopping 70% of Latin America's population is unbanked or underbanked. That's significantly higher than in a developed economy like the U.S., and it gives Nu a large addressable market.
You would typically expect a company like this -- one that's still clearly in hyper-growth mode -- to be losing huge amounts of money each quarter. But this couldn't be further from the truth.
Nu generated $379 million of net income last quarter. That number has climbed rapidly in recent quarters thanks to efficiency gains. This company is proving to have a scalable business model that is boosting the bottom line as revenue continues to grow.
Consider the valuation
Nu has clearly passed Berkshire Hathaway's rigorous screening from a quality perspective -- its growth and profitability are outstanding. And the momentum doesn't look like it's stopping anytime soon.
But before investors scoop up shares, it's important to factor in the valuation as well. Shares have been on a wild ride. From their initial public offering in December 2021 to their all-time low in June 2022, they cratered 68%. But it has been an impressive resurgence since then, with the stock skyrocketing 254%.
Even so, shares don't look that expensive. To be fair, they trade at a forward price-to-earnings ratio of 28.7, which might seem high for a business that's still a bank operator exposed to the whims of broader economic trends. But that valuation multiple is just slightly higher than the tech-heavy Nasdaq 100 Index, an entry point that seems reasonable to buy the stock and hold for the next five years.
