Where will Nu Holdings shares be in 3 years?

Not Holdings (NOT 5.20%)one of Latin America’s fastest-growing digital banks, went through some wild swings after its initial public offering (IPO) in December 2021. It went public at $9 per share, fell below $4 the following year, but it is now trading at around $9. $15.

Nu’s bulls praised its rapid growth, but bears worried about its macro and competitive headwinds. So will Nu stock grow over the next three years or will it stagnate and underperform the market?

Image source: Getty Images.

What happened in the last three years?

It does not offer its digital banking services in three countries: its home market of Brazil, Mexico and Colombia. Its online-only approach has allowed it to expand its business at a much faster rate than its regional brick-and-mortar competitors.

From 2021 to 2023, Nu expanded its customer base from 33.3 million to 93.9 million. Its activity rate (its active customers divided by its total number of customers) increased as it launched more financial services, and its average monthly revenue per active customer (ARPAC) more than doubled as the costs of serving those customers s – they kept constant.

Data source: Nu Holdings.

As a result, Nu’s revenue grew at a compound annual growth rate (CAGR) of 117% from 2021 to 2023. Adjusted net profit, which turned positive in 2021, soared at an astounding CAGR of 1,246% between 2021 and 2023. also became profitable on a generally accepted accounting principles (GAAP) basis in 2023.

What will happen in the next three years?

It did not maintain this momentum in the first half of 2024. At the end of the second quarter of 2024, its customer base grew to 104.5 million, monthly ARPAC increased to $11.20, and cost its monthly average for serving each active customer only increased to $0.90. Its activity rate remained steady at 82% in the first quarter and 83% in the second quarter.

Analysts expect Nu’s total revenue to rise 42% for the full year. From 2023 to 2026, revenue and GAAP earnings per share (EPS) are expected to grow at a CAGR of 32% and 54%, respectively.

This would represent a slowdown in its growth from the past three years, but it is still one of the fastest growing fintech companies in Latin America and the fourth largest financial institution in the region by total number of clients. Those are also incredible growth rates for a stock that trades at 26 times next year’s earnings.

That’s because Nu valuations are being compressed by concerns about Brazil’s currency devaluation issues and inflationary headwinds in its other markets. It could face stiff competition from MercadoLibrethe Latin American e-commerce leader seeking to consolidate its digital wallet and fintech services into a digital banking platform in Mexico. Rising interest rates have also prevented many US investors from diving into high-growth stocks such as No — however, Warren Buffett Berkshire Hathaway remains one of its most important investors.

Nu shares may not rise much until 2027

It might face some macro and competitive headwinds in the short term, but it has plenty of ways to grow over the next three years. It is poised to capitalize on rising income levels, internet penetration rates and digital banking rates in Latin America. It is improving its artificial intelligence (AI) tools to analyze customer data, operate chatbots and strengthen its security features, and it can still lock out a lot of unbanked or underbanked customers.

Assuming Nu meets analyst expectations by 2026, grows its EPS by another 30% in 2027, and still trades at 26 times forward earnings, its shares could be trading at around $26 in about three years. This would represent a gain of almost 80% from the current price. It could be a bumpy ride, but it still looks like a promising growth stock for patient investors.