American investors might not be too familiar with Nu Holdings (NU -1.34%). True, it's a large-cap company with a $65 billion market capitalization currently. And yes, Warren Buffett's Berkshire Hathaway owned a stake in it for about three years. But because it operates in Latin America, Nu probably flies under the radar for many here in the U.S.
This fintech stock has soared by an impressive 230% in the past three years (as of June 25), although it has taken investors on a volatile ride along the way. But should you buy shares right now while they trade below $15?
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Nu continues to grow at a brisk pace
Because of how mature the financial services industry is, there aren't that many companies in the space that are rapidly rising up through its ranks. Here's where Nu stands out. Its leaders saw an opportunity to target unbanked and underbanked populations in Latin America, providing them with a digital-first platform that offers bank accounts, brokerage services, credit cards, loans, and crypto trading, among other things.
As of March 31, Nu had 119 million customers, the vast majority of them in its home market of Brazil. The company now counts a remarkable 59% of that country's adult population as its customers. In the last three years, Nu has essentially doubled its customer base.
Nu also operates in Mexico and Colombia, both markets that have sizable potential. Combined, they have a population of 185 million people -- 13 times greater than the number of customers Nu has attracted so far in those countries.
The leadership team is optimistic. According to their estimates, Nu has only captured 5% of its gross profit total addressable market in Brazil. One key pillar of its growth playbook is to constantly innovate. Nu just launched a service offering private payroll loans in Brazil, taking on the established players in that part of the industry.
It also has a travel service (NuTravel) and a mobile phone service (NuCel). These initiatives clearly show its willingness to venture beyond financial services. It might have plans to enter other new markets down the road, further expanding revenue potential. However, so far, executives are playing it close to the vest.
Sensitive to external forces
Because Nu's growth has been so spectacular, investors might overlook the fact that this is still a bank at its core. And that means that Nu is heavily exposed to certain factors outside of its control.
Interest rates are one thing to keep in mind. No one can reliably predict with any level of precision what direction interest rates are headed in over the longer term. But rate hikes and cuts can have profound impacts on Nu's revenue and earnings. A recession or economic downturn would also spell trouble for the bank, as demand for loans would fall, delinquencies would rise, and spending activity would take a hit.
Nu's operations are entirely in Latin America, which is still a developing region. On the one hand, that's an advantage, as it provides Nu with a huge opportunity to expand its offerings, bring on new customers, and ride the wave of GDP growth and smartphone/internet penetration.
On the other hand, developing economies are prone to volatility. For instance, Brazil's economy is dependent on commodity exports, which can be influenced by market prices that can negatively impact GDP. There are other issues as well, like political instability and corruption. These elements can make running a successful financial services enterprise difficult.
Nonetheless, Nu has performed exceptionally well in the face of these ongoing risks. Its revenues have soared, and so have its profits. Diluted earnings per share jumped 47% year over year in Q1, and analysts are forecasting that this key metric will increase at an annualized pace of 36% between 2024 and 2027.
With shares trading at a forward P/E ratio of 23.5, investors should consider buying this fintech stock while it's still below $15.
