Great companies rarely go on sale. That's especially true for great companies that are growing quickly. Most of the time, businesses with rapid growth rates are assigned pricey valuations by the market. But every now and then, a short-term correction allows savvy investors to lock in an incredible price for an equally incredible business.
If you've been searching for growth stocks with big upside, this company is for you.
NYSE: NU
Key Data Points
This is one of my favorite companies
For years, Nu Holdings (NU +0.62%) has been one of my favorite businesses. Most Americans haven't heard of this company because it does business solely in a handful of Latin American countries: Colombia, Brazil, and Mexico.
But Nu's founders are former venture capital veterans, and they know how to identify and execute on a growth opportunity that, at least in this case, should persist for decades to come. If that's not exciting enough, Warren Buffett's holding company has also owned Nu shares since the company went public in 2021, though he did recently trim his position.
What exactly is it that makes Nu such a great business? The key lies in the company's differentiated approach to banking. A little over a decade ago, Nu was founded by a former employee of Sequoia Capital, one of the most venerable venture capital companies.
That former employee was David Vélez, who had noticed during his investment scouting trips to Latin America that the financial industries in many of those countries were years behind the U.S. Many markets were controlled by a handful of powerful incumbents that had little incentive to shake up the status quo. Therefore, fees even for basic services were relatively high, and overall innovation was low.
In response, Vélez started Nu with a few other colleagues. The goal was to disrupt Latin America's financial sector as quickly as possible. Their method of choice: A smartphone app. At the time, most Latin American consumers were using physical branches to do their banking. By going through a smartphone -- a novel idea at the time -- Nu could get directly in front of potential customers with minimal competition. And with a digital-first business model, Nu's costs were lower, since it didn't need to hire thousands of employees to manage hundreds of brick-and-mortar branches.
Nu was able to penetrate this stodgy market with incredible speed. Its financial services had lower fees, easier access, and -- just as importantly -- significantly faster speeds of innovation. The company could, at the push of a button, offer a new financial service -- like crypto trading or life insurance -- to its entire customer base in seconds. These advantages have led to significant growth. More than half of all Brazilian adults are now Nu customers, with Nu's total customer base going from essentially zero in 2013 to more than 100 million today.
Latin America has more than 650 million residents. While Nu's growth rates are slowing, it has a long growth runway ahead of it. Due to the recent pullback, Nu's valuation is now too cheap to ignore.
Time to invest $1,000 in Nu Holdings stock?
After a brief pullback, Nu shares now trade close to their cheapest levels in nearly a year. For instance, the company trades at just 28 times earnings -- cheaper than the S&P 500 overall -- and yet earnings growth is expected to be in the double digits this year. On a forward basis -- that is, based on what analysts expect the company to earn next year -- shares trade at just 20 times forward earnings.
NU data by YCharts. PS = price-to-sales. PE = price-to-earnings.
Growth stocks like Nu typically show plenty of volatility as the market constantly rerates how it wants to value the stock. But Nu has a wonderful long-term business strategy with durable advantages and a savvy management team. With shares trading at just 20 times forward earnings following the pullback, this growth stock has become too cheap to ignore.
