Nu Holdings Gears Up for Earnings Report: Seven Reasons It Remains a Strong Buy
Nu Holdings (NYSE: NU), the top digital bank in Latin America, is set to release its third-quarter earnings report after the market closes on November 13. Despite an impressive 80% rally in its stock price this year, many investors are hesitant to jump in. However, there are compelling reasons to consider Nu as a growth stock.
1. Rapid Customer Growth
Nu’s customer base has skyrocketed from 33.3 million at the end of 2021 to 104.5 million by the second quarter of 2024. As a digital-only bank, Nu has outperformed traditional banks with its swift expansion.
Image source: Getty Images.
There’s still significant opportunity for Nu to grow. The World Bank reports that around 70% of Latin America’s population remains unbanked. However, internet access in this region has surged from 46% in 2013 to 81% in 2023, suggesting a ripe market for digital banking. Presently, Nu operates in Brazil, Mexico, and Colombia, but its upward trajectory positions it for potential expansion into more countries.
2. Increased Customer Engagement
With new customers, Nu has introduced a wider array of services, including checking, credit cards, lending, insurance, investment, and cryptocurrency trading. The company’s Nu Shopping e-commerce app has surged, attracting a record 255 million visits in 2023.
This increased activity has led to a rise in Nu’s customer activity rate, moving from 76% at the end of 2021 to 83% in Q2 2024. Furthermore, the average revenue per active customer (ARPAC) climbed from $4.50 to $11.20 during this time.
Despite challenges like inflation and currency volatility in its core markets, Nu’s revenue is projected to expand at a strong compound annual growth rate (CAGR) of 35% from 2023 to 2026 as these economic pressures ease.
3. Expanding Service Ecosystem
Nu continues to broaden its service offerings to deepen customer loyalty. Recent innovations include generative artificial intelligence (AI) tools to enhance customer analysis and financial chatbots, plus improvements in cybersecurity. Additionally, the introduction of NuCel, a cellular service, extends their influence beyond finance.
4. Controlled Customer Costs
As Nu’s customer base has grown, the average monthly cost to serve each active customer remained stable at $0.80 from 2021 to 2023, increasing to only $0.90 in the first half of 2024. This stability indicates that the company is gaining operating efficiencies as it scales.
5. Rising Profits
Nu has effectively kept its costs down, reaching a positive adjusted profit in 2021 and achieving profitability on a generally accepted accounting principles (GAAP) basis by 2023. Analysts forecast that Nu’s GAAP net income will grow at a CAGR of 56% from 2023 to 2026 as it expands further.
6. Attractive Stock Valuation
Currently priced at $15, Nu trades at just 25 times forward earnings and 5 times next year’s sales. These valuations could appear cheap given the company’s growth potential. Although concerns related to Latin America’s economy and competition from MercadoLibre (NASDAQ: MELI) exist, a proven performance may enhance the stock’s attractiveness.
7. Continued Support from Warren Buffett
Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) invested in Nu during its IPO in 2021. The $1.6 billion investment represents only 0.6% of Berkshire’s portfolio, yet the company has not divested any shares, even while selling off major holdings like Bank of America and Apple for liquidity in the past year.
Buffett’s commitment to Nu speaks volumes: its rapid growth, increasing profits, expansive competitive advantages, and fundamental value make it a worthy consideration for investors looking to buy before the next earnings report.
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Bank of America is an advertising partner of Motley Fool Money. Leo Sun has positions in Apple, Berkshire Hathaway, and MercadoLibre. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, and MercadoLibre. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
