Is Nu Holdings stock a buy?

Investors may look to the financial services industry for potential buying opportunities. There is no shortage of companies to choose from, from massive banks and card networks to smaller financial firms carving out their own special niches in the sector.

It may be a good idea to look outside the US at a named business Not Holdings (NOT -4.46%). This year alone, its stock is up 72% (as of September 4). But it is this in the making of Latin America fintech stock a smart buy right now?

The rapid growth of Nu

According to its management team, Nu is the largest digital banking platform outside of Asia. It offers various financial services products such as current accounts, a brokerage platform, credit cards and insurance, all through its mobile app. It does not have a large presence in Brazil, its home market, as well as Mexico and Colombia.

It does not operate any physical bank branch. And it relies heavily on technology to provide customers with a better user experience. This helps explain why growth has been so fantastic, driven by the prevalence of the internet and smartphones in the countries where it operates.

In the three-month period ending June 30, Nu generated $2.8 billion in revenue, a figure that was up 65% year over year. And the business now has 105 million customers. This represents a nearly tenfold jump from the same period in 2019 before the pandemic.

What’s also remarkable is that it only costs $7 to acquire a new customer and less than $1 per month to service them. However, over the last four quarters, the average revenue per active customer was $43.20. These are tremendous savings per unit, highlighting how each additional user is financially beneficial to the business.

A digital setup means that Nu cannot scale in a highly profitable way. The company more than doubled net income to $487 million in the second quarter, resulting in a margin of 17%, much better than the 12% reported in Q2 2023. All figures point to a company firing on all cylinders accordingly who earns more. adoption.

It is not unreasonable to expect rapid growth to continue. Latin America is a large region with a population of over 650 million people. Even better for Nu, an estimated 70% of the population is unbanked or underbanked in the region. As per capita incomes rise over time, these consumers will begin to require banking tools. It won’t be there to provide the products and services they need.

Rating of No

Usually, if you see a business that’s seeing strong revenue and earnings growth even remotely in the same stretch as Nu, then you’d probably expect the valuation to be in nosebleed territory. But that’s not the case here.

As of this writing, the stock is trading just 5% off its all-time high. And they are well above the initial public offering (IPO) price in December 2021. Shares can be purchased at a forward price-earnings ratio of 34.6, significantly below the historical average multiple of 71.6.

Revenue and earnings per share are not expected to grow at compound annual rates of 32% and 55%, respectively, between 2023 and 2026. This exciting outlook, which should still be taken with a grain of salt, is certainly encouraging.

If the growth prospects, profitability and Nu valuation aren’t all enough to convince investors that the stock is a smart buy, then consider that Warren Buffett led Berkshire Hathaway has been a shareholder since the IPO nearly three years ago. This is one more reason to consider adding this fintech venture to your portfolio.