Shares of Nu Holdings (NU +4.98%) have been volatile over the past 12 months. Their 52-week high is 69% higher than the 52-week low (as of Sept. 29). But investors should understand that the wild ups and downs are separate from how the actual business is doing. This is why it's absolutely critical to take a closer look at Nu's financial performance.
Is this fintech stock a millionaire maker?
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Nu's growth is the driving force
Nu's historical performance provides hints of its true potential. The fundamental gains have been nothing short of phenomenal. The company's growth is the most compelling characteristic.
The business raked in $5.9 billion in revenue in Q2 (ended June 30), up 39% year over year on a currency-neutral basis, with net income rising 49%. It added 4 million net new customers during the three months, and it now has 140 million users in total. The vast majority are in Brazil, with Mexico and Colombia growing rapidly.
Management says that Nu is the largest digital banking platform in Latin America. Aided by its focus on technology and data, the company has been targeting the huge unbanked and underbanked population in the region.
Risks come from two obvious sources
Deteriorating credit conditions are perhaps the biggest risk factor investors should be mindful of. Of Nu's entire $77.6 billion of credit exposure, 83% is from credit cards, a high-interest and unsecured product. In adverse economic times, customers will likely neglect these payments first.
Nu has a strong position in Latin American banking. But the countries it operates in have their own macro-related risks. Currencies are volatile. Economies are still emerging. Inflation can be a problem. And there is political corruption.
Investors who primarily allocate their capital to U.S. stocks usually don't consider these variables. But for Nu, unfavorable trends in any of these areas could derail its impressive growth story.
That said, the valuation is inviting. The stock trades at a forward price-to-earnings ratio of 14.8. At this entry point, investors might be willing to accept the risks.
NYSE: NU
Key Data Points
The million-dollar question
I believe long-term investors, particularly those looking for the potential to achieve above-normal capital appreciation, should consider Nu Holdings. As mentioned, customer, revenue, and profit growth have all been exceptional. There appears to be a sizable expansionary runway ahead as well. And as it scales up, Nu is likely developing a set of competitive strengths.
But I don't think this business has what it takes to be a millionaire maker. If you put $10,000 into the stock today, you'd need to post a monster 100-fold gain to reach the seven-figure mark. Over a 25-year time horizon, this translates to a 20% annualized rate of return. It's almost impossible to find any opportunities in the market with this kind of potential.
