Nu Holdings (NU -1.33%) has no presence in the U.S. But that doesn't mean it should be off your investing radar. It's a $74 billion banking behemoth that's making waves in Latin America. And investors have reaped the rewards. Shares have surged 248% in the past three years (as of Oct. 3).
Should investors buy this soaring fintech stock while it's trading below $16? I think it's a valuable exercise to consider both the bear and bull cases for Nu.
Image source: Nu Holdings.
Nu's bear case concerns the markets it operates in
While it exists solely in the digital world, operating as a banking entity presents an obvious risk. Like its peers in the industry, Nu is exposed to macroeconomic forces. Changes in unemployment rates, consumer confidence, and interest rates, for instance, can have a huge impact on the economic backdrop. And that can influence the company's revenue and profit trends. All banks have to deal with this.
What's more, the fact that Nu is a business in Latin America could make things even more challenging. This region is a developing economy, whose primary exports are natural resources and commodities, which makes it more prone to booms and busts. There is volatility in terms of inflationary pressures, currency fluctuations, and political instability.
These are things investors should be thinking about, especially in relation to a financial services institution such as Nu.
Nu's monster success is hard to ignore
Nu's bear arguments are valid. And every investor should consider them. However, given the company's incredible success, these risks are overshadowed by what is an extremely compelling bull case.
Nu is taking the digital banking world by storm and finding unbelievable adoption. At the end of 2021, it had 53.9 million customers. As of June 30 of this year, it had 122.7 million. In fact, 60% of the adults in Brazil are Nu customers. That supports a strong market position, as Brazil has a total population of 213 million people and gross domestic product (GDP) of $2.2 trillion. Besides its most important market, the business is growing quickly in Mexico and Colombia as well.
These countries are not as developed as the U.S., so there remains a sizable opportunity. Nu is leaning on rising penetration of smartphones and internet access, which obviously supports digital banking activities. And there is a sizable portion of people that still need to be banked.
Revenue has climbed at a compound annual rate of 45.6% over the past three years. And according to Wall Street consensus analyst estimates, the company's top line will increase at a yearly clip of 30.7% between 2024 and 2027.
It's not that common to see a company that's scaling up so rapidly like Nu is, adding customers and growing revenue in a remarkable fashion, to also be producing robust profits. It typically takes earlier-stage businesses time to reach a certain level where sales more than offset operating expenses. Nu is past this point, which is certainly an encouraging sign that management knows how to run things efficiently.
During the most recent quarter, Nu registered net income of $637 million, translating to a superb profit margin of 17.4%. The bottom-line figure has soared, and this trajectory is set to continue in the years ahead.
As if the bull thesis weren't compelling enough, investors who aren't still convinced will be persuaded by the attractive valuation. Shares trade at a forward price-to-earnings ratio of 18.7. This is a notable discount to the widely followed S&P 500, which presents a very enticing entry point. Nu's earnings growth over the next five years is sure to be significantly higher than the average company out there.
Taking all factors into account, it's difficult not to be optimistic about this company. With the stock trading below $16, it's time for investors to press the buy button.
