Berkshire Hathaway and Cathie Wood Own Nu Holdings Stock. Why You Should, Too.
Nubank, Latin America’s largest fintech bank, has the ability to grow globally. A recent pullback in its parent company’s shares offers an attractive entry point.
By Teresa Rivas
Oct. 11, 2024 4:30 am ET
Cayman Islands-based Nu Holdings is the owner of Nubank, Latin America’s largest fintech bank. Above, a Nubank card is used to make a purchase in Brazil.
Courtesy Nu Holdings
You can’t please all of the people all of the time, but Nu Holdings stock has done enough to capture the eye of both Warren Buffett and Cathie Wood, investors at polar extremes of the investing spectrum.
Nu Holdings does seem to have something for everyone. The Cayman Islands–based company is the owner of Nubank, Latin America’s largest financial-technology bank focusing on the large population of underserved consumers, known as the underbanked, in Brazil, as well as the unbanked in Mexico and, more recently, Colombia.
“This has been one of the strongest growth stocks across the world, and certainly within emerging markets,” says Zac Gill, global equity research analyst at Jennison Associates, which counts Nu among the top 10 holdings in its International Opportunities fund.
The growth portion of the equation comes from Nu’s rapidly expanding profits, as users leapfrog from cash to the digital and credit age, while a recent pullback provides a more compelling valuation for new investors.
Though it might not be the typical Buffett holding—and may have been purchased by one of his deputies— Berkshire Hathaway probably “sees the disruption to the traditional banking model that Nubank has pioneered in Latin America,” says Ramiz Chelat, a portfolio manager for Vontobel ’s Quality Growth Boutique. “It’s one of the leaders globally in digital banking. and it has such a strong cost advantage over the incumbent banks that’s very difficult [for competitors] to replicate.”
Many legacy banks in Latin America are content to do business with higher-income individuals and corporations, which offer a steadier, more traditional revenue stream via a network of branches. Yet digitally native Nubank has aggressively gone after consumers at the opposite end of the spectrum and has quickly become the dominant player in Brazil, counting some half of the adult population as customers. Gill notes that while Nubank is still seeing fairly swift user growth in that nation, it has now shifted to focusing on average revenue per user, where it has a huge runway for growth from its sizable base.
Bulls hope that Nu’s Mexico operations, which accounted for just over 5% of business last year, will follow a similar path. Though Nubank is still in the customer-acquisition phase in that country, where more people are unbanked versus underserved, many key metrics, like deposit growth, are showing more positive trends than in Brazil.
There has been some concern about the increase in nonperforming loans, or NPLs, which edged up in the second quarter. Those worries look overblown, given Nu’s ability to appropriately price for delinquencies, as evidenced by improvement in risk-adjusted net interest margins. It also makes provisions for losses ahead of time when it underwrites new cohorts of credit, meaning that net interest margins should continue to improve over time.
“Looking at NPLs in isolation can lead you to incorrect conclusions,” says Jennison’s Gill.
The upshot is that after turning a profit for the first time, in 2023, the consensus calls for earnings per share to soar some 73% this year, and 43% in the next, on revenue gains of about 30%. And although investors may be worried about the economic outlook for Brazil and Mexico—given that a downturn would disproportionately hurt Nu’s lower-income customers—the massive shift from a cash economy to digital banking should proceed regardless.
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“You just need a moderate level of growth in Brazil and Mexico” to support Nu’s trajectory, says Vontobel’s Chelat, who notes that a recession isn’t his base case for either nation. “The potential Nubank has in serving the underbanked segment is going to significantly outgrow the economic environment.”
Gill also notes that profitability will get a boost from the fact that Nubank’s steep capital expenditure early on, from building its software to hiring risk experts, are now in the rearview mirror. “As the cost of income goes down, operating profit can come up as the business scales, and there’s no real ceiling on that,” he says.
That’s especially true if the company branches out into other regions. Although there have been no formally announced plans to enter new countries, the company has said it’s a possibility, and speculation has ranged from the U.S. to Indonesia, the latter being another large underbanked population just like those Nubank excels at catering to.
“That’s what makes Nubank so interesting—the fact that they have the ability to grow globally in new markets,” says Chelat.
With Nu stock up some 60% this year, to a recent $13.43, and trading at 24 times forward earnings, value investors might be wondering where they fit into the picture. Yet after a modest pullback at the end of September, that forward price/earnings ratio is well below its triple-digit average over the past five years, and not far off its low of just under 19 times, creating an attractive entry point.
And you can take that to the bank.
Write to Teresa Rivas at teresa.rivas@barrons.com
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