We came across a bullish thesis on Nu Holdings Ltd. (NYSE:NU) on ValueInvestorsClub by jgalt. In this article, we will summarize the bulls’ thesis on NU. The company’s shares were trading at $10.82 when this thesis was published, vs. the closing price of $11.00 on Apr 17.
A bank teller assisted by an automated teller machine, emphasizing the combination of traditional banking and modern digital technology.
NU provides a digital banking platform in Brazil, Mexico, Colombia, the Cayman Islands, and the United States.
NU’s business model offers a possible 16-24% growth in the next five years. It has a market penetration of 60% in Brazil with 84.9% active customers. While growth in Brazil may be limited to low single digits, Colombia and Mexico remain untapped markets for the future. NU has a cost-to-serve measure that is 85% lower than incumbent banks due to its no-branch and fully digital payment service. Since it has a lower cost base, NU enjoys a net interest margin of over 10% as it is able to offer better interest rates on deposits and loans. The efficiency ratio is on par with the most efficient banks in the US with the management confident of improving it in the future.
The growth prospects not only arise from expansion in Mexico and Colombia but also from better revenue realization from its existing customers. Its average revenue per active customer per month (ARPAC) is $11, which is much less compared to mature banks ($25) and incumbent banks ($40). While limited on-field resources may keep ARPAC low for NU, the potential for a considerable increase cannot be ruled out. NU has also been extremely cautious in dishing out loans with a low loan-to-deposit ratio. The interest income will definitely rise once the loan-to-deposit ratio catches up with the industry. NU is also working on a core banking platform that will allow it to expand into new geographies seamlessly and with minimal cost.
NU has declined by 22% in six months due to negativity surrounding the Brazilian economy and a revenue miss in its latest quarterly result. The profitability is highly suppressed due to a cautious approach but once the loan deployment improves, ARPAC should rise with profitability growing exponentially.
While we acknowledge the potential of NU as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than NU but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
