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New Holdings (New York Stock Exchange: NU) is a fast-growing company providing banking services to underserved regions of Latin America. The company dominates the Brazilian banking market and has significant growth opportunities across the region to serve the underbanked and underbanked.
Although Nu has experienced impressive growth, it has tended to fly under the radar because it is an international company with which many U.S. investors are unfamiliar. The company’s stock has taken investors on a roller coaster ride since its 2021 initial public offering (IPO), doubling in the past year, with a recent crash.
Is the stock a buy, hold, or sell going forward? Read on to find out.
Repairing Brazil’s broken banking system
Brazil’s banking system has been dysfunctional for years. At one time, five banks held about 80% of Brazil’s financial system assets and operated in an oligopoly, charging customers exorbitant fees. In a 2020 parliamentary hearing, Brazil’s Finance Minister Paulo Guedes called the country’s biggest banks a “cartel” that demands “exorbitant” interest rates on loans.according to S&P GlobalBrazilian banks charge fees of up to 160% on credit card loans and up to 70% on personal loans, making Brazil’s banking industry one of the most profitable in the world, but many Brazilians was left without access to a bank account.
Nu’s founder, David Velez, has an impressive pedigree: he was born in Colombia, earned an engineering degree from Stanford University, and works for the company. morgan stanleyGeneral Atlantic, and Sequoia Capital.
Velez’s mission was to bring banking to the masses of Latin America. His first goal was to break up Brazil’s banking oligopoly. Nubank plans to provide banking services through a digital banking model. This means that by not having a physical branch, you can reduce overhead costs while significantly reducing the exorbitant fees that customers are used to.
Nu customer growth is phenomenal
Nu’s approach to banking has had a dramatic impact. In 2020, the bank had approximately 33 million customers in Brazil. By the end of the third quarter of last year, the bank’s customer base totaled 84 million people, serving more than half of Brazil’s adult population. At the same time, the total amount paid increased by 282%, exceeding $ 29 billion.
The bank has done a great job of growing its business through cross-selling and upselling products to existing customers, with average revenue per active customer increasing 18% in the third quarter. Net income was $303 million, marking the bank’s third consecutive year of profit.
Be aware of these risks
Investors should keep in mind the risks of investing in Nu Holdings. The Bank is an international stock and is subject to risks such as currency fluctuations and political, economic and regulatory changes.
All banks also face risks that they must deal with, such as the possibility of loan defaults if Brazil’s economy slows. Fitch Ratings said last year that Brazilian banks could face pressure on asset quality and profitability.
In the third quarter, 6.1% of New’s loans were in default for 90 days or more, up from 4.7% last year. While this isn’t a cause for concern at this point, investors will want to monitor Nu’s creditworthiness and charge-offs in the coming quarters for signs of increased delinquencies or borrower strain.
Nu’s growth potential is huge, but this stock is not for everyone
Nu’s growth opportunities are huge. The bank already dominates the Brazilian market, with more than half of Brazil’s adult population banking with Nu.
The company is now setting its sights on two more markets ripe for growth: Mexico and Colombia. In the past three years, the bank has gained 4.3 million customers in Mexico and an additional 800,000 customers across Colombia. Mexico is Latin America’s second-largest consumer market, and about half of the population remains unbanked.
Nu Holdings is the fastest growing bank in Latin America and is also experiencing impressive growth in Brazil. Long-term opportunities are attractive as we expand into other parts of Latin America. The bank trades at a higher price than traditional banks in the U.S., but it’s also grown much faster than traditional banks.
The stock is prone to volatility due to its rapid growth and high valuation, but I think it’s a solid buy for investors who understand the risks and are willing to hold the stock for the long term despite short-term price fluctuations.
Should you invest $1,000 in Nu now?
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Courtney Carlsen has a position at Morgan Stanley. The Motley Fool has a position in and recommends S&P Global. The Motley Fool recommends Nu. The Motley Fool has a disclosure policy.
Nu Holdings Stock: Buy, Sell, or Hold? Originally published by The Motley Fool
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