Most U.S. investors don't know about Nu Holdings (NU 5.18%). Yet this fintech company is backed by some of the best investors in the world, like Sequoia Capital. Even after the 18% rise in value this year, it's easy to see how much more upside potential is possible in the years to come.
If you're looking for an undervalued growth stock to buy and hold for years, or even decades, you will want to get familiar with Nu and its impressive business model.
NYSE: NU
Key Data Points
Nu Holdings is a growth machine
Since launching in 2013, Nu has gone from a small fintech start-up into a large and mature financial services company. During the past decade alone, the company has gone from a few million customers to more than 100 million. Why haven't most people heard of Nu? It operates in just three countries: Colombia, Mexico, and Brazil, where it's based. But within these countries, Nu is wildly popular, especially in Brazil, which is its most mature market. More than half of all adults there are Nu customers.
What made Nu's rapid growth and adoption possible?
While working at Sequoia Capital, Nu's founder, David Velez, was sent to Latin America to search for investment opportunities. During that search, he realized that Latin America's banking industry was consolidated, stodgy, and lacking innovation. Customers there were still paying high fees for simple services like bank accounts and debit cards. Velez left Sequoia to start Nu, a digital-only bank that offered innovative financial services directly to customers by using a smartphone. The result was lower fees and more access to customers, with rapid adoption potential for Nu's products.
Nu has already tapped the most attractive markets in Latin America, and its penetration in places like Brazil likely presents much less room for growth than in the past. But it's still early innings in new markets like Mexico and Colombia. The rest of Latin America, meanwhile, holds plenty of long-term promise, given that the region is home to more than 650 million people. Why, then, are the shares so cheap, trading at just 21 times forward earnings, cheaper than the S&P 500 overall?
Image source: Getty Images.
This fintech stock is surprisingly cheap
The S&P 500 trades at roughly 22 times forward earnings. Yet Nu's revenue is growing by more than 70% annually, with profit margins that are still scaling higher after turning positive in 2023.
Why are Nu shares so cheap? There are a few reasons.
NU Revenue Growth Estimate for Current Fiscal Year data by YCharts
Number one, most American investors still haven't heard of the stock, limiting its potential buyer base. Second, it's not clear how much longer Nu can maintain its high sales growth rates, given saturation in the biggest markets. Finally, Nu's profit margins may come under attack with more competition. Nu had the market largely to itself during the past decade. But competition is heating up, potentially forcing Nu to spend more on customer acquisition or lower its fees for existing customers to retain them.
Even with these risks, Nu stock looks too cheap to pass up. Yes, sales growth may slow, but there are still many years of double-digit percentage growth ahead. While profit may be pressured in the long term, the fact that the company only recently achieved profitability means that we still may not have seen how these profits scale. American fintech peers like PayPal and Block have profit margins in the teens. However, the American market is perhaps a decade ahead of Latin America's.
In summary, the risks for Nu are real. But they are all long-term risks -- think the next decade and beyond. At such a cheap valuation, Nu is still an exciting buy at today's levels.
