Sept Idea Comp - Nu Holdings Ltd. ($NU)
  1. SUMMARY

  • Nu Holdings Ltd ($NU) is one of the WORLD’S largest digital banking platforms with 65.3M customers and they are just getting started.

  • Massive untapped LatAm TAM outside of main Brazil operations.

  • NU has increased active customers (75% YoY) and their average revenue per customer (105% YoY), which is translating into sky-high revenue growth of 230% YoY to $1.2B

  • Opportunities outweigh the risks = asymmetric risk-reward.


  1. INVESTMENT THESIS

Overview
  • Founded May 2013 and IPO’d in Dec 2021 (at $9/share), NU is a founder-led digital banking platform with >65M customers across Brazil, Mexico, and Colombia. NU creates new financial solutions for individuals and SMEs that are simple, intuitive, convenient, and low-cost. NU’s mission is “fostering access to financial services across Latin America”.

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  • NU is capitalizing on the underbanked population of LatAm (see below example) while maintaining high Net-Promoter-Score of 90+. They have provided >5M people with their FIRST bank account or credit card.

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Competitive Advantage
  • NU is well positioned to capitalize on secular tailwinds and demographic trends of digitization among the younger generation in emerging markets.

  • The network effect of being the #1 card issuer in all 3 countries gives them additional cross-selling opportunities. Mexico & Colombia are in their infancy and have higher growth rates than Brazil did.
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  • NU is increasingly moving from single-product to multi-product and capturing not only individuals, but SMEs too (2M already!). This enhances their ecosystem offering and “builds a fence” around their customers for long-term retention.
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Financial Metrics & Growth
  • Formula for Success: Management's core focus/formula is a significant strength because they are very entrenched in enhancing the below 3 metrics. It’s evident that they have capitalized on this thus far, but they are still early in their growth trajectory.
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  • Compounding Effect = Higher ARPAC: NU’s ability to cross-sell has been steadily improving and much quicker than previous quarters. The average products per client is now 3.7. This effect is an obvious trust builder between customers and NU since more customers (55%) are now using NU as their primary bank account. I expect this to continue as new products get released/enhanced, which ultimately makes customer’s financial lives easier (and cheaper!).
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  • Revenue Growth: Extremely impressive especially given the global macro headwinds and the additional LatAm/Brazil exogenous factors. Revenue grew 230% YoY to $1.2B in Q2’22 - yes, that is NOT a typo. In addition, the ARPAC increased 105% YoY to $7.80/month. $7.80 may not seem significant, but with a $0.80/month “cost to serve” you get an efficient business model. Although I don’t expect NU to continue growing at 230%, I wouldn’t be surprised by triple-digit growth in the short-term.

  • Profitability: Brazil region had net income of $13M in H1'22 for the first time ever. NU has overall profitability in its sights, but will balance it with growth/expansion by being the lowest cost operating platform in the industry as noted by the CEO:

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Valuation
  • While valuing hyper-growth companies is proven difficult due to not being optimized for income yet, we can still look to the Price/Sales ratio for some insights.
  • The NTM P/S is currently 4.52, whereas average since IPO has been 11.49.

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  • While traditional valuation metrics don’t provide much substance, it's often far more constructive to evaluate hyper-growth businesses based on their business progress/metrics/KPIs like we have done above for NU. Therefore, I place little weight on valuation ratios.


Risks
Macroeconomic Factors:
  • In addition to the global inflation and recession risks, there are region specific risks to Brazil such as currency devaluation and the Presidential election which could contribute to a downturn in the economy. If this materializes further it could impact customer spending, credit demand, payment volumes, and loss of trust in the financial system.

Competition
  • Recently, there has been large VC dollars flowing into LatAm fintech (2020=$4.1B to 2021=$15.7B, per LAVCA), therefore competition will become more fierce. This is relatively mitigated by NU's first-mover advantage, but needs to be monitored closely.


  1. BOTTOM LINE

  • It’s undeniable that LatAm is a massive fintech opportunity poised to help the un-banked population and provide better/cheaper access to financial products. I believe NU is at the forefront of digitization and destined to capitalize.
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  • Following the $9.00 IPO in Dec 2021, I believe the current price of ~$5.20 presents a strong bull case over the next 12mo and more importantly, larger upside over the next 3-5 years.


*Disclosure: I added to $NU at $5.10 today and reiterate strong buy rating.
Dave Ahern's avatar
Great write up of a great biz. I believe they have the highest net promotor score in LATAM too. And anecdotally, when I was in my fiancés little city in southern Brazil everyone had their purple cards and the local bank was struggling because everyone was using Nu.
Beaver Capital's avatar
@ifb_podcast love hearing the local/real experiences with the business! I can only hope they will be able to replicate what they’ve done in Brazil thus far.

Has your fiancé or family ever been a customer? Would be curious to hear feedback and how loyal they are to Nu
Dave Ahern's avatar
@beaver_cap based on what I saw they will keep executing there. Brazil has a real need for their service.

Yes, two of her nephews were customers and loved it. They tried talking me into opening an account 😂😂. But because I am not a citizen no go.

Happy I can help you in anyway. Again great stuff.
Beaver Capital's avatar
@ifb_podcast thanks Dave, appreciate it!
Arthur Svidzinski's avatar
I live in Brazil and I don't like $NU at all. The company has grown a lot, that is true. However, $NU ha failed to capitalize this large costume base. The profile of the regular costumer doesn't generate revenues, they are usually people that just want a fee-less digital bank account. They don't take credit, other financial products and will probably flee if the company tries to raise its fees in the future. $NU has a $25 billion market cap and has zero profit, even with an already large costumer base. I think $NU is too expensive for a non-profitable company with many doubts. The stock was crushed after IPO, not without reason.
Beaver Capital's avatar
@asvid interesting insights, thanks Arthur! Their average customer has 3.7 products with NU, so they generally are capitalizing on cross-selling currently.

Despite being relatively large at a $21B EV, they have really only capitalized on the Brazil market and one of the metrics that lead me to invest in $NU is that their growth rates early on in Mexico and Colombia are higher than Brazil were at the same stage - lots of addressable market within LatAm left for them.

That being said, there are execution risks forsure. LatAm is not an easy market so they still have a tough, but exciting road ahead!
Dave Ahern's avatar
My pleasure 😄
Nathan Worden's avatar
My super-app spidey-senses are tingling 🕸
Beaver Capital's avatar
@nathanworden would love to see it all wrapped into one super app!

I would love to have access to a super app with all of these products and features here in Canada, but our Fintech landscape is much further behind… we are still using e-transfer for P2P payment cause no Venmo/Cash App
Nathan Worden's avatar
@beaver_cap oh wow— is Venmo and Cash app just not popular, or is there something blocking them from entering those countries?
Beaver Capital's avatar
@nathanworden not available in Canada and not exactly sure why they haven’t expanded here yet. Maybe $NU will get here before them!
Stock Metal Investment's avatar
Great write up, heard the name a lot in combination with $MELI. How would you say is the relationship between NU and Mercado Page+Credito? Is any grabbing market share from the other or is the market opportunity significant enough for both to grow independently from each other.
Beaver Capital's avatar
@stonkmetal They operate in some of the same segments, so some overlap there. But LatAm fintech is more of a “winner takes most” as opposed to “winner takes all” so I see both company’s remaining the clear leaders. Lots of unbanked TAM!
That said, $MELI would be more mature in that it has a wider ecosystem and operating in more countries, therefore greater revenue diversification. But $NU has proven itself in Brazil and looking like that hyper growth is spilling over to Mexico and Colombia.
Have you looked into $NU at all? I know you’re a $MELI fan along with me
Stock Metal Investment's avatar
@beaver_cap I haven't looked into them much yet. My thinking always was "I have Mercado Pago feeding off the MELI ecosystem, that's all I need" :D Might be worth it to dig deeper though after reading this post.
Beaver Capital's avatar
@stonkmetal probably worth a watchlist spot imo until you can dig deep! Lots of great tidbits floating around and they keep crushing expectations like $MELI does
I will say that as a brazillian that used NU for the last three years the app was great, but honestly right now there is a lot more offer in the market and the great banks here have already adapted to what NU is offering. I think this company has a long and arduous task to become positive and its fee-less offerings for customers are both what drives people to it and what drives profits away from it.
Beaver Capital's avatar
@r_p_m yeah my hope is that they can stay ahead of the legacy banks in terms of innovation. Seem to be doing that thus far as their growth is much higher than the average bank.

On profitability - their Brazil segment was profitable this year, so hopefully $NU's operating leverage can start to kick in and drive profits while still maintaining growth spend.
Conor Mac's avatar
I love how this pitch brought out a lot of first hand experiences in the comments from folks who have lived in the region or know someone who has. That's some great scuttlebutt right there.

Also, fantastic write up sir, kudos!
Beaver Capital's avatar
@investmenttalk thanks Conor! Yeah i agree, some good ol scuttle is some of the best research points. I talk to a few people other people who live in LatAm about both $NU and $MELI which always gives great insights you don’t find anywhere else

Hope you’re enjoying your India trip!
Conor Mac's avatar
@beaver_cap i am very much so, thanks :)
Sagar Vensi's avatar
The growth potential here is huge.
Beaver Capital's avatar
@stockado agreed. What excites me most is their growth trajectory in Mexico and Colombia while using the same proven gameplan (plus product enhancements) that they used for their success in Brazil.

Still many risks involved like regulation, political forces, and competition. But I believe there is asymmetric risk to the upside.

What’s your favorite part of $NU’s business?
Sagar Vensi's avatar
@beaver_cap To be honest, i track these financial institutions just for fun. I'm very careful with my banks selection so I go with Indian banks, that have been growing at 20% for several decades. I liked the report because in 750 words, you covered the most important points.
Beaver Capital's avatar
@stockado awesome, Indian banks are an area I have not researched. But when they grow at 20%, that catches my attention!

Appreciate your comments, Sagar
Joey Hirendernath's avatar
Would love to hear what sparked your initial interest in $NU
Beaver Capital's avatar
@joeyhirendernath came across $NU while researching $MELI actually! Then saw their headline growth rates so I had to dig deeper once I saw that

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