Should You Buy Nu Holdings Shares Below $14?

Now holding (NYSE: NOW) It is a digital bank that has subverted Brazil’s traditional banking industry. The area was once known for its limited options and outrageous customer fees, leaving many residents without access to banking. However, with its innovative approach to banking, Nu has become dominant and significant Berkshire Hathaway among its investors.

The consumer finance company is expanding its operations into other key markets in Latin America, including Mexico and Colombia. However, the stock has had a rocky road lately as concerns about its credit have grown. On top of that, Berkshire trimmed some of its positions, with the stock down 29% from its recent 52-week high.

With the stock trading below $14 per share, is it time to buy Nu Holdings on the dip?

For years, Brazilians have been denied access to an inclusive banking system. Five banks control 80% of Brazil's financial assets, effectively operating as an oligopoly and charging customers exorbitant fees. Five years ago, interest rates on credit cards were as high as 160% and on personal loans were as high as 100%.

This is a pain point that David Vélez, co-founder and CEO of Nu Holdings, seeks to solve. Nu has the opportunity to disrupt the banking conditions Brazilians have to deal with due to regulatory changes.

The company has launched a purely digital new banking model that operates without any physical branches. Thanks to significantly lower administrative costs, the company can offer free accounts and credit cards with no annual fees, and lower borrowing costs, resulting in incredible growth since its inception.

Since 2020, Nubank's customer base has grown from 24 million to nearly 99 million today, representing more than 56% of Brazil's adult population. Over the past few years, the number of unbanked people in Brazil has increased from 16.3 million to 4.6 million, accounting for approximately 3% of the country's adult population.

Image source: Getty Images.

Nu's significant growth may still be in its early stages, as the company aims to expand throughout Latin America. By entering the Mexican and Colombian markets, Nu is embracing the potential of the region's two largest economies.

In the third quarter, Nu's customer base jumped to 2 million in Colombia and 8.9 million in Mexico, an incredible 150% and 106% growth, respectively, compared to the same period last year. The latest data from Susquehanna Financial Group shows that 51% of Mexico's population remains unbanked, equivalent to about 66 million people. This provides Nu with a huge opportunity to win the hearts and minds of new customers.

Nu's performance is booming, with seven consecutive quarters of net profit growth. In the third quarter alone, Nu generated profits of $553 million, an increase of 82% compared to the same period last year and an impressive 13.5% increase compared to the previous quarter..

Nu is experiencing rapid growth, but its stock has fallen out of favor with investors recently, with its shares down 29%. Despite solid growth, some investors worry that the stock price has risen too quickly, leading to overvalued valuations. In late October 2024, before the recent sell-off, Nu was trading at about 48 times earnings and over 10 times sales. The stock is now priced at about 31 times earnings and 7 times sales.

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NU PE ratio data provided by YCharts. PE = price-to-earnings ratio. PS = selling price.

There are growing concerns about a slowdown in credit card and personal loan activity in Brazil. Notably, nonperforming loans delinquent for 90 days or more rose to 7.2% from 6.1% a year ago. Additionally, the company recorded $1.6 billion in write-offs, a significant increase from approximately $957.6 million a year ago.

Credit card receivable growth also slowed after a period of strong growth. Currently, that number stands at $15.2 billion, which is only slightly higher than the $14.5 billion reported at the end of 2023. Berkshire Hathaway reduced its position in Nu by 19% in the third quarter and now holds 86.4 million shares of the financial technology company.

Nu Holdings is exploring new verticals to expand its total addressable market. In recent years, the company has launched a number of services, including NuPay, NuTravel and NuMarketplace. Most recently, the company launched mobile phone service NuCel to diversify beyond financial services.

This multi-faceted approach allows Nu Holdings to leverage its large customer base in Brazil and create a digital ecosystem that promotes cross-selling opportunities. "I believe the opportunity to move beyond financial services by adding a variety of verticals is huge," Vélez said. Ultimately, Nu aims to make its revenue stream less cyclical and less reliant on continued growth in credit.

Investors will want to keep an eye on Nu's loan growth and loan portfolio. While the recent increase in delinquency rates was within management's expectations, further increases could ultimately impact the company's bottom line.

That said, Nu continues to grow at an impressive rate, and the potential for continued expansion in previously underserved markets makes it attractive. Its rapid growth and high valuation make the stock prone to volatility, so it may not be suitable for more conservative investors. However, after the recent sell-off, I think Nu is a solid growth stock worth buying today for long-term investors.

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Courtney Carlson has no position in any of the stocks mentioned. The Motley Fool owns and recommends Berkshire Hathaway. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.

Should You Buy Nu Holdings Shares Below $14? Originally posted by The Motley Fool