Nu Holdings (NU 0.12%), one of the fastest-growing digital banks in Latin America, went through some wild swings after its initial public offering (IPO) in December 2021. It went public at $9 a share, dropped below $4 the following year, but now trades at about $15.
Nu's bulls praised its rapid growth, but the bears fretted over its macro and competitive headwinds. So will Nu's stock head higher over the next three years, or will it stagnate and underperform the market?
Image source: Getty Images.
What happened over the past three years?
Nu provides its digital banking services in three countries: its home market of Brazil, Mexico, and Colombia. Its online-only approach enabled it to scale up its business at a much faster rate than its regional brick-and-mortar competitors.
From 2021 to 2023, Nu expanded its customer base from 33.3 million to 93.9 million. Its activity rate (its active customers divided by total customers) increased as it rolled out more financial services, and its monthly average revenue per active customer (ARPAC) more than doubled as the costs for serving those customers held steady.
|
Metric |
2021 |
2022 |
2023 |
|---|---|---|---|
|
Customer growth |
62% |
38% |
26% |
|
Activity rate |
76% |
82% |
83% |
|
Monthly ARPAC |
$4.50 |
$8.10 |
$9.60 |
|
Monthly average cost to serve per active customer |
$0.80 |
$0.80 |
$0.80 |
|
Total revenue growth |
130% |
182% |
68% |
Data source: Nu Holdings.
As a result, Nu's revenue soared at a compound annual growth rate (CAGR) of 117% from 2021 to 2023. Its adjusted net profit, which turned positive in 2021, also skyrocketed at a whopping CAGR of 1,246% from 2021 to 2023. It also turned profitable on a generally accepted accounting principles (GAAP) basis in 2023.
What will happen over the next three years?
Nu maintained that momentum throughout the first half of 2024. At the end of the second quarter of 2024, its customer base grew to 104.5 million, its monthly ARPAC rose to $11.20, and its monthly average cost to serve each active customer only inched up to $0.90. Its activity rate held steady at 82% in the first quarter and 83% in the second quarter.
Analysts expect Nu's total revenue to rise 42% for the full year. From 2023 to 2026, they expect its revenue and GAAP earnings per share (EPS) to grow at a CAGR of 32% and 54%, respectively.
That would represent a slowdown from its growth over the past three years, but it's still one of Latin America's fastest-growing fintech companies and the region's fourth-largest financial institution by total customers. Those are also incredible growth rates for a stock that trades at 26 times next year's earnings.
That's because Nu's valuations are being compressed by concerns about currency devaluation issues in Brazil and inflationary headwinds in its other markets. It could face stiff competition from MercadoLibre, the Latin American e-commerce leader that is trying to consolidate its digital wallet and fintech services into a digital banking platform in Mexico. Elevated interest rates have also prevented many U.S. investors from diving into high-growth stocks like Nu -- yet Warren Buffett's Berkshire Hathaway remains one of its top investors.
Nu's stock could head a lot higher by 2027
Nu might face some near-term macro and competitive headwinds, but it has plenty of ways to grow over the next three years. It's poised to profit from rising income levels, internet penetration rates, and digital banking rates across Latin America. It's beefing up its artificial intelligence (AI) tools to analyze customer data, operate chatbots, and strengthen its security features, and it can still lock in a lot of unbanked or underbanked customers.
Assuming Nu matches analysts' expectations through 2026, grows its EPS by another 30% in 2027, and still trades at 26 times forward earnings, its stock could be trading at about $26 in approximately three years. That would represent a near-80% gain from its current price. It could be a bumpy ride, but it still looks like a promising growth stock for patient investors.
