Warren Buffett famously said 35 years ago that value investing and growth investing are "joined at the hip." A stock with a price-to-earnings ratio (P/E) of 5 may actually be expensive because of its deteriorating business, while one with a P/E of 50 may be cheap because of upcoming years of hypergrowth.
One financial technology company that has historically traded at a premium earnings multiple is Nu Holdings (NU -0.39%). It trades at a high P/E ratio compared to its consumer banking competition but is growing earnings at a rapid clip.
Does it still deserve a growth multiple? Here's why now might be a perfect time to buy Nu Bank stock.
NYSE: NU
Key Data Points
Massive user base
Nu Holdings is the parent company of Nu Bank, a consumer banking application that has taken Latin America by storm --specifically, in the three largest countries by population: Brazil, Mexico, and Colombia.
Management and founder David Velez's strategy was simple. Use the fact that the average bank in these countries drowns customers with high fees, long in-person visits, and predatory loan products to build something much superior. Nu Bank is a bank that customers can easily manage on their mobile devices, offering services such as credit cards and consumer loans with value propositions that vastly improve on those of legacy institutions.
It is this mousetrap of treating your customers better that has led 135 million people to sign up for a Nu Bank product across its three operating countries. Within these markets, average revenue per active customer just hit $16, up from $7 in the same period in 2022. Nu Bank is not only attracting new customers but also increasing usage over time.
This is why revenue is up 170% in the last three years, with a positive earnings inflection for a company that came to the public markets unprofitable. Net income was up 41% year over year last quarter and $3.2 billion over the last 12 months.
Image source: Nu Holdings.
Why Nu Holdings' stock deserves its high earnings multiple
Nu Holdings trades at a P/E ratio of 22, which is higher than most banking stocks. Banks tend to trade at lower earnings multiples due to the inherent cyclicality of the lending business, which Nu Bank is not immune to.
However, Nu Bank has a much better growth runway ahead than the average bank, in both revenue and earnings. If it keeps doing what it's doing with adding new users and expanding revenue per user, total revenue will likely double within a few years, with net income growing faster. This makes the stock cheap even though it trades at a high P/E ratio for a bank.
