The ultimate growth stock to buy for $500 right now

What does ultimate growth stock do? Beyond high growth rates, I’d say it needs to have long-term growth drivers, be on the cusp of or already demonstrating profitability, have some sort of hedging or resistance, and not be overvalued.

Does it sound too good to be true? Check Not Holdings (NOT 1.48%). It is a digital bank based in Brazil that offers a wide range of financial services in three Latin American countries and attracts a wide customer base with its low rates, easy-to-use platform and modern technology. It has all this and more.

High growth rates

Quarterly growth rates have been incredibly high for Nu because it’s adding customers at a rapid rate — and those customers are engaging at high rates. It didn’t add more than 5 million customers in the second quarter, surpassing 100 million for the first time, for a total of 104.5 million. Customers from its headquarters and main market in Brazil continue to join at a healthy pace, despite more than half of the adult population — 56 percent — already using the platform and engagement rates rising, from also, reaching 83.4% in the quarter.

Average Revenue Per Active User (ARPAC) grew 30% year-over-year and continues to grow sequentially and on a currency-neutral basis.

Data source: Nu Holdings.

Long-term growth engines

The bank is still capturing market share in Brazil and is growing even faster in its newer markets, Mexico and Colombia. Mexico added 1.2 million customers in the second quarter for a total of 7.8 million, while Colombia topped 1 million in the quarter.

It still has limited service in the countries and recently launched the high interest savings account which is attracting new members. Business growth in Mexico was the main driver of deposit growth in the second quarter, with deposits there tripling in the past two quarters since the savings account was launched. Management says these two markets are still in their “investment phases.”

As Nu takes on more accounts and launches new services, it leads to greater engagement and more cross-sells and up-sells. This should keep growth rates robust for the foreseeable future.

Near or demonstrating profitability

All of this could pose risks if Nu doesn’t turn sales dollars into profit. But the company is reporting strong profits for several consecutive quarters, driven by a stable cost of acquisition and a low cost of servicing, which it says is 85% lower than incumbents. Increases in deposits also lead to increases in net interest income (NII) and margin (NIM) in credit activity. NII rose 77% year-on-year in the second quarter, while NIM increased from 13% to 14%. Total net income increased 134% to $487 million, currency neutral.

It doesn’t demonstrate that kind of profitability, even as businesses in Mexico and Colombia remain in the red. It’s important for a company that can grow over the long term to have that kind of capital available to grow without worrying about overall profitability, which is probably one of the reasons why Warren Buffett likes this stock.

Hedging his bets

Buffett has talked about varied earnings streams as a characteristic he looks for in a stock, and Nu is expanding his platform to protect his business. It has diversified to cover bank accounts, lending products and other financial services.

High deposit growth, which is driving growth in its newer markets, gives it cash to fuel its lending business, and it has assumed some additional risk and default given its growing lending portfolio and healthy. Total portfolio grew 49% year over year in the second quarter and loan originations increased 78%.

Reasonable rating

Nu stock trades at a forward price-to-earnings ratio of 23, which looks like a bargain relative to its performance and opportunities. It certainly seems reasonably valued compared to other high-growth stocks.

Too good to be true?

So, isn’t it a no-brainer purchase? There is still some risk because it operates in a region where there is high economic volatility and it is still a fairly young company. This is mitigated by strong risk management and stability to date.

It is also a Buffett stock. This isn’t proof of anything, but since Buffett generally avoids riskier stocks, it gives investors a flavor of the level of risk with No stocks. I’d say it’s minimal at this point.

If you have $500 to spend after paying off debt and saving for an emergency, you can get a fair amount of Nu stock while it’s still under $15. You’ll thank yourself later.