Shares of Nu Holdings (NU 2.14%) were on track to double again in 2024 like they did in 2023. But they are down 20% over the past three months, and ended the year up only 24%, slightly underperforming the S&P 500.
If investors can zoom out and focus on the long term, they will be able to ignore the short-term noise that's affecting the digital banking stock today. Let's see where Nu could be three years from now.
Revenue and membership: Much higher
One problem Nu does not have is attracting new members and generating higher revenue. It ended the third quarter with 109.7 million members, 20.7 million more than last year.
Most of its growth is still coming from its home country of Brazil, where it's still adding more than a million members every month. But while that country accounts for 98.8 million members -- the vast majority -- it's growing at a faster pace in its other large markets, Mexico and Colombia.
Revenue continues to increase at a fast pace.
| Metric | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 |
|---|---|---|---|---|
| Revenue growth | 57% | 64% | 65% | 56% |
Data source: Nu quarterly reports. All growth is year over year, currency neutral.
Management recently announced that it's going to invest in Tyme Group, a digital bank serving South Africa and the Philippines. It plans to replicate its model in those countries and reap rewards from its own investment.
If that's successful, it could lead to expansion in different global regions -- not to mention further expansion in other Latin American countries, where it could be simple to copy its already successful playbook.
In three years, it's likely to be adding lots of members, catching on in its new markets, and generating robust revenue growth.
Profits: Different stages in different markets
Nu's profits have been soaring, and they increased from $303 million to $553 million in the third quarter. It has an upselling and cross-selling strategy that leads to increased engagement and higher revenue per active user, and that leads to scaling up and profits.
Having a booming business in Brazil is giving it the leverage it needs to branch out into newer markets. Nu is still not profitable in Mexico or Colombia, but it's making enough money in Brazil to cover launch expenses elsewhere. The company is growing in Mexico on a faster timetable than it did in Brazil, and it's likely to become profitable in that region sooner, too. It's at an even earlier stage in Colombia.
NYSE: NU
Key Data Points
In three years, it could be profitable in all three countries, but it may take more time. Overall, though, it's likely to be reporting higher company net income. It's a capital-light business, with no physical branches, and that lends itself to a profitable model.
Credit: It depends on the economy
There were several contributing factors to Nu's plunge at the end of last year. One was stubborn high inflation in Brazil. However, its credit business is still holding up well.
Loan originations increased 79% year over year in the third quarter, and deposits were up 60%. The interest-earning portfolio expanded 81% to $11.2 billion.
The trajectory of the Brazilian economy over the next three years will play a major role in Nu's business development. There's an element of risk when investing in a company that operates in a volatile economy, but so far, the fintech is navigating smoothly in the turbulence.
Over time, economies tend to get better more of the time than worse. Investing in any bank stock is knowing that the "worse" times are going to happen, but overall, the pressured times will be more than made up for by the better times.
The stock: Rewarding investors
I can see why the market was spooked by the trifecta of a Buffett sale that happened in the third quarter, high inflation, and an unexpected investment in a new brand. But the efficient management, strong performance, and incredible long-term opportunity look much more compelling to me.
On top of that, Nu Holdings stock looks cheap. It trades at less than 13 times forward one-year earnings, which could be a bargain. This looks like an excellent opportunity to buy the stock on the dip, and in three years from now, your investment should be worth a lot more than it is today.
