Financial technology and digital banking took the United States by storm in the last few decades. Now, the same trend is happening in Latin America, and it is being dominated by one company: Nu Holdings (NU 0.60%). The online and mobile-focused bank is capturing tens of millions of new customers to join its service in Brazil, Mexico, and Colombia, disrupting stodgy legacy financial institutions with a better customer experience.
Nu Holdings, otherwise called Nu Bank, has grown at an incredible pace in these emerging markets. Yet the stock is barely higher than it was at its IPO in late 2021. Here's why the stock is a buy before its next earnings report on Aug. 14.
NYSE: NU
Key Data Points
Growing usage in Brazil
Nu Bank began its journey in Brazil in 2013 by launching an online-only bank with an easy-to-use smartphone application. Compared to the existing banks in the country, with their terrible customer experiences and high-interest-rate loans, Nu Bank was a sight for sore eyes, leading to rapid adoption in the nation. From 2013 to today, Nu Bank has gone from a standing start to over 100 million accounts in Brazil, or over half of the population.
In Brazil, Nu Bank's annual revenue will likely pass $10 billon this year. But the company is just getting started in the nation. It has a major plan to keep upselling its banking, lending, payment card, and investing products to active customers. The company's average revenue per active customer is $11.20 a month. Its earlier customers are now at much higher levels, and compared to incumbent institutions with an average monthly revenue per customer of over $40, Nu Bank has just barely cracked the surface of its revenue-generating potential in its home market.
At $10 billion in revenue today, Nu Holdings has a chance to double or even triple its total annual sales in Brazil, even if it doesn't grow its customer count again. That is a nice place to be in as a business, innovating while the legacy banks keep their inferior business models.
Image source: Getty Images.
Rapid expansion in Mexico
Brazil is starting to mature as a market for Nu Bank. That's not so much the case in Mexico, where the company has 11 million customers in a total population of approximately 130 million. With a similar situation to Brazil, where incumbent players have stodgy systems that frustrate customers, Nu Bank has the green light to steal market share in Mexico. It just received its official banking license to operate in Mexico, which will give it full lending and banking capabilities to offer its clients.
Average revenue per active customer is lower in Mexico than in Brazil, and Nu is still in the early innings of adding new customers to the platform. This combination should enable Nu Bank to grow revenue in Mexico for many years. Compared to just under $700 million in trailing revenue today, I wouldn't be surprised if Mexico becomes a $10 billion annual revenue business for Nu.
The company is not stopping in just these two countries. It has entered the Colombian market, with management hinting that it plans to expand to other countries -- likely Argentina, Chile, and Uruguay -- within the next few years. While Colombia has lower revenue today and is a poorer country economically than Brazil or Mexico, the potential of the rest of Latin America is another positive spot for Nu Bank's mission to try to bring modern digital banking to the masses.
NU Net Income (TTM) data by YCharts.
Why Nu Holdings stock is a buy
Nu is not only a fast-growing company, it's also highly profitable. It generated a return on equity (ROE) of close to 30% over the last 12 months, which is an important metric for banking that measures the net earnings the business generates compared to its equity base, a measure of profit efficiency. A ROE of 30% is highly impressive for Nu Bank, especially when you consider that the company is still reinvesting heavily to grow. If it stopped its aggressive market and product expansion, the company would likely be generating an even higher ROE.
So what does Nu Bank earn? Over the last 12 months, its net income was $2.15 billion, giving the stock a trailing price-to-earnings ratio (P/E) of 30. A P/E at this level may seem high for a bank, but few banks are growing as fast as Nu Bank. Last quarter, top-line revenue grew 19% year over year, with plenty of room to continue growing in Brazil, Mexico, and Colombia, let alone any new markets that Nu Bank enters in the future. Earnings should grow even faster than revenue as the company gains more economies of scale and stops spending so much money acquiring new customers.
Add it all up, and I think Nu Holdings' P/E can fall rapidly to a dirt cheap level, making the stock one to buy and hold before its upcoming earnings report in August and hold for the long term.
