Nu Holdings Ltd. (NYSE:NU) is growing extremely fast in the emerging countries of Brazil, Mexico and Colombia. They expand their product range in a way that leads to strong synergy effects that are impressive because customers are taking advantage of more and more Nu offers. In the future, you will benefit from the advancing digitization, which still has a lot of room for improvement in South America. The company is now on the verge of profitability and is expected to do so in the next year. Since the IPO, the share price has fallen by 50% and, in my view, now represents an attractive entry point.
Nubank is a digital banking platform in Brazil, Colombia and Mexico. The company’s goal is to build an entire ecosystem around money. A great app for saving, spending, investing and borrowing money. The company also offers life insurance and cell phone insurance. Comparable fintechs are Revolut or Wise (OTCPK:WPLCF) (an interesting company I wrote about here). Currently they have 63 million private and 2 million small and medium sized enterprises (SMEs) customers. More than 90% of customers are from Brazil, although they only added Colombia as a market in Q1 2021 and Mexico in Q4 2020.
Structural tailwind in South America
In my research, I will mainly focus on Brazil, the most important market for Nu, although very similar trends apply to Colombia and Mexico. There are some structural tailwinds here. The first is the age structure. Brazil has a very young population with an average age of 34 (US 39; Europe 44). Younger population groups are more likely to use online banking and digital payment options. In addition, Brazil also shows stronger population growth: 0.7% in 2020 (in Mexico even 1.1%; USA 0.4%).
Another growth driver will be that online spending is still in a key growth phase, comparable to Europe and the US 10-15 years ago. The share of online shopping is still meager at 4.3%, “since 72 percent of the population has not yet made their first online purchase” (JPMorgan Research). Of course, not only online shopping is important to Nu, but also that as many small shops and retailers as possible accept digital payment solutions on the street. Overall, there is still a lot of room for growth, as the infrastructure in terms of internet access and high-quality cell phones is not yet mature enough to handle these digital solutions.
Just over four in ten Brazilians (41%) say their internet connection is too unstable to make online purchases, with Brazilian internet speeds (18Mbps) almost three times slower than the global average of 49Mbps s.
All in all, everything indicates that digital payment solutions and online banking will grow very strongly. It was important for me to name all of these points because it will be much easier for a company with so much tailwind to continue to grow.
Exploding customer base
These are the numbers for Brazil showing explosive growth. The activity rate is particularly encouraging here, and the company is already cash flow positive in Brazil. Of course, the fintech industry has been a big winner from the pandemic. The growth rate has slowed in the wake of the pandemic, but is far from flat, as we’ve seen at times with Netflix (NFLX), for example.
In the Nu ecosystem, customers seem to be becoming more loyal to the app over time and using more and more of the different products. This increases revenue per customer. They have some fantastic graphics in their investor presentation.
This indicates that Nu has made some very effective improvements to its app. Customers seem to be accelerating using the app as their primary bank account. Also, early customers from 2017 and 2018 started using just one of the products on offer, while most are now starting with several. This suggests that the company is doing a great job when it comes to offering additional services like insurance or credit. I think the chart on the right is a bit misleading as the company probably had fewer products to start with. Nevertheless, the trend seems to be very clear.
Especially in relation to the following graphic: Revenue per customer. The current average is $7.8 per month per customer. However, here we see that over time, users are becoming more valuable and generate increasing revenue as they use a greater number of the company’s offerings. ARPAC is defined as average monthly revenue divided by the average number of unique monthly active users for a given period. I think this number is one of the most important ones and I will be monitoring this in more articles in the future. In Brazil, the market will eventually be saturated, so further growth can be achieved through more revenue per customer. In Colombia and Mexico, the company is only at the beginning of its development (this development also needs to be monitored further).
Another exciting and meaningful graphic is the number of volumes per customer. A very similar picture emerges here: The longer a customer uses the app, the more frequently he uses it for purchases. As a Revolut customer, I understand this development very well. Their product is also better and more customer-friendly in all areas; That’s why I use their card more and more and my 15-year-old classic bank account less and less. It seems to me that Nu is achieving in South America what I’m seeing with Revolut in Europe.
Current results and rating
In the second quarter, the company posted revenue of $1.16 billion, beating the consensus estimate of $1.04 billion. Revenue in 2021 was just $336.1 million. Overall there was a loss per share of $0.01. With the Brazilian operation already cash flow positive and loss per share minimal, estimates are that the company will be positive earnings per share starting next year; $0.05 according to Seeking Alpha; according to Yahoo Finance $0.07. At the current share price of $4.98, EPS of $0.06 would translate to a P/E of 83.
I’m usually very cautious about highly valued stocks, but I have to say that in this case the valuation doesn’t seem too extreme if the estimates are reasonably correct. The actual value of the share should only become apparent over the long term. Financially, the company is very healthy with $600 million in debt and $3.2 billion in cash
Stock dilution and insider selling
One thing I always want to look at, especially for companies that aren’t yet profitable, is stock dilution and whether there’s insider selling. But I couldn’t find any data on that. According to Yahoo Finance, there have been no insider sales in the past six months. There has also been no notable share dilution since the IPO.
Every business has risks, and fast-growing companies have even more. One of them is exchange rate risk. The Company generates its revenues in currencies other than the dollar and is therefore currency sensitive in its per share reporting. However, as the business grows in Colombia and Mexico, this risk decreases as internal diversification becomes more cross-currency.
As mentioned at the beginning, the company will benefit in the long term from the tailwinds of the industry and the region, but will be heavily dependent on economic developments in the short term. A recession would hit the company’s earnings hard as consumer spending would fall.
And of course there is a significant risk of more competition. Many companies want to participate where there is a lot of money to be made. This development can also be observed in the fintech sector in developed countries. There are now many digital banks to choose from, which hardly make any difference from the customer’s point of view. Nu’s advantage is that it already has a large customer base, as long-standing customers are less likely to switch. However, it could become more difficult to acquire new customers.
The growth potential in terms of the number of customers and their monetization is still enormous. Nu could create a super app in South and Central America. If economic growth and purchasing power per person increase, the company will benefit directly. It’s a speculative investment, but given the approaching profitability and the already massive user base, it seems like an attractive risk/reward tradeoff.