Shareholders of Nu Holdings (NU -7.39%) had a hard time during the first year or so that the company was public. But it’s been a fantastic story after the lows.
Since the start of 2023, this fintech stock has soared 243% (as of Nov. 26). And the momentum has continued into 2024, although it’s been a volatile journey.
Could buying Nu today set you up for life?
Thriving digital banking provider
Gone are the days of consumers having to visit their local branch to take care of anything related to their money needs. Smartphones and the internet have changed financial services, allowing a business like Nu to offer bank accounts and credit cards, among other things, digitally to consumers.
The company has been growing like wildfire. Nu posted $2.9 billion in revenue in the last three months, a figure that was 56% higher than in the same period last year. The company has 110 million customers today, compared to just 48 million three years ago. Nu has a strong position in its main market of Brazil, but it has started to make progress in newer countries like Mexico and Colombia.
Investors should be optimistic about the future. According to Latin America Reports, an estimated 70% of the population in this region of the world remains unbanked or underbanked, giving Nu a huge opportunity.
Nu’s top-line growth has translated into unbelievable profitability. Net income surged 107% year over year to $553 million in Q3. The profit margin expanded considerably in the last 12 months.
Developing an economic moat
One clear sign of a high-quality business is the presence of an economic moat. Typically, younger companies haven’t yet established durable competitive advantages. However, I think Nu has reached a point where its moat should be obvious to the investment community.
As is the case for dominant banking providers, switching costs play a prominent role. Once a consumer decides to use the financial services of a specific company, linking all their various accounts and getting familiar with how things operate, they become less inclined to change providers. A certain level of trust can be built with Nu when its customers can count on it as a reliable financial partner for their everyday needs.
The average Nu customer uses four different products from the company. And 60% use Nu as their main banking account. This proves that the business has established a favorable position that should benefit it for a long time.
Another moat source Nu is experiencing is cost advantages, particularly as it scales up. In the latest quarter, it cost the company $0.80 per month to serve the average customer, which was down year over year. As Nu gets larger and its revenue and customer base expand, it’s better able to leverage its expenses, partly owing to its digital model.
Nu stock’s valuation
For a stock to set you up for life, it probably needs to generate outstanding returns over an extremely long period of time, say multiple decades. This is difficult to predict, as what happens that far out in the future is unknowable. No one could’ve known that buying Apple or Netflix, for example, 20 years ago would result in truly monster gains. I think it’s best to set the same realistic and humble expectations with Nu. It’s hard to forecast what will happen.
But Nu possesses some very favorable qualities, namely its market positioning, surging profits, and competitive advantages, that should draw investor attention. The fact that the valuation is still reasonable is another reason the stock should be considered for your own portfolio.
As of this writing, Nu shares trade at a forward price-to-earnings ratio of 32. This looks like a compelling entry point for long-term investors.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Netflix. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.
