Stock market drawdowns are stressful. You are bombarded with news headlines about how the world is ending, markets are in turmoil, and why now is the time to sell.
Usually, reality is not as bad as the headlines suggest. As of this writing, we have entered a stock market drawdown, and these headlines are starting to show up again. No one knows whether this is the start of a new bear market or only a temporary pullback in the current bull market.
However, what I do know is that smart investors don't run from stock market drawdowns; they embrace them. They are a chance to buy fast-growing, high-quality businesses on the cheap.
Nu Holdings (NU 1.27%) -- with its stock down 33% -- is a potential buy for investors looking for a rapidly growing financial technology upstart on the cheap.
The best way to analyze a stock during a down market is not to zoom in on daily price movements, but to zoom out. Let's try to figure out where Nu Holdings stock could be in five years.
NYSE: NU
Key Data Points
Taking the Brazil playbook to Mexico and Colombia
Nu Holdings is the parent company of Nubank, a digital bank that started in Brazil. With its sleek mobile interface and features catering to the Brazilian market, the company has gained market share rapidly and dethroned existing players in the country. About 58% of the adult population of Brazil uses Nubank, or around 100 million people. That is incredible growth from a standing start around 10 years ago.
Now, the company is beginning to monetize its user base more and more. Since 2020, monthly revenue per active customer has grown at a 33% annual rate across the entire Nubank business. Combined with consistent user growth in Brazil, the market has gone from $609 million in revenue to $9.5 billion within a few years. That is more than a tenfold increase in revenue within just a few years.
Brazil is not where Nubank's ambitions end, though. It has launched its banking platform in Mexico and Colombia, which are both seeing rapid adoption. Mexico's users surpassed 10 million last quarter; Colombia's surpassed 2.5 million. With combined populations of approximately 180 million, these two countries still have a lot of room to run for Nubank.
More countries on the docket
On the latest conference call, management said the first 10 years of its business were centered on winning the Brazilian market and proving the product could work in other Latin American countries, like Mexico and Colombia. Over the next 10 years, it wants to test that hypothesis in other countries in Central and South America.
This is a large market opportunity, including sizable countries such as Peru, Argentina, and Chile -- with a combined population of around 100 million -- and many smaller but wealthier markets such as Uruguay and Costa Rica. In total, Latin America has a population of around 650 million.
Unlike Europe and East Asia, the population of the region is set to grow for at least the next decade, if not longer. This provides a huge market opportunity for Nu Holdings.
NU PE Ratio data by YCharts.
Where will Nu Holdings be in five years?
Given its track record, I have no doubt Nu Holdings can grow its revenue over the next five years. It will probably not be as fast as the last few years, but I think it isn't crazy to expect its $11.5 billion in revenue to triple to $35 billion over that time.
The good thing is that in recent years, Nu Holdings has increased its earnings as well. Net income has gone from negative a few years ago to almost $2 billion in 2024. As the company scales up and gains more market share in Mexico and Colombia, I think its earnings can grow even faster than its revenue, and I wouldn't be surprised if net income reaches $8 billion in five years.
Today, Nu Holdings stock has a market capitalization of approximately $50 billion. Its price-to-earnings ratio (P/E) on 2024 earnings is 25, which doesn't look overly cheap. However, one doesn't make money on what a company earned in the past, but what it will earn in the future.
If the business generates $8 billion in net income five years from now, the stock's P/E will be close to 6 based on today's market capitalization. I think a fast-growing fintech deserves to trade at a much higher multiple, meaning that Nu Holdings stock should be higher five years from now.
