Nubank: Stay Long This World-Class Fintech – Results Are Accelerating

In February of this yr, we revealed an article on Nubank (NYSE:NU) titled: “Nubank: Wager Large On Latin America With This Fintech Monster”.

The core of the article was centered on NU’s unimaginable LTV/CAC ratio, asset gentle enterprise mannequin, and demographic tailwinds within the area. Add these up, we thought, and the trail to profitability and an much more premium valuation appeared clear.

Quick-forward to the current, and our thesis has confirmed out to be largely right. The inventory is up about ~41% from the place we rated it a ‘Robust Purchase’, which has trounced the S&P 500’s return over that very same interval of ~12%:

Regardless of this appreciation, we predict the inventory really nonetheless has appreciable upside on account of accelerating internet revenue progress, stable monetization tendencies, and potential a number of growth.

At present, we’ll re-iterate our thesis, cowl updates that have occurred since our preliminary protection, and contact on why we nonetheless assume shares are finally a ‘Robust Purchase’.

Sound good? Let’s dive in.

Our Unique NU Thesis

In case you missed our first article, we like NU for a few causes.

First off, the financial institution is a hard-charging entrant to the traditionally stagnant banking market in Brazil. This offers the corporate a really completely different value construction to the standard, oligopoly banks which have existed up so far, like Itaú (ITUB).

A decrease value of servicing prospects, primarily based on a digital-first technique, signifies that NU has been in a position to undercut opponents on pricing and costs. These decrease charges, when mixed with the premium digital expertise, have led to extremely sturdy CX, and thus, model, among the many Brazilian populace.

Phrase of mouth has been an enormous acquisition channel for the corporate, and when mixed with a monetization ladder that is simply starting to filter via, by cohort, NU’s ensuing LTV/CAC is unimaginable.

Because of this the financial institution could make far more cash per unit of spend than nearly anybody. This strategy has caught the massive incumbent banks flat-footed, and now greater than 50% of Brazilian adults have an account. Practically 60% of these adults take into account NU to be their ‘main’ financial institution.

Between the model, value construction, and bettering monetization, the corporate has a stable observe document of success that administration has lately been seeking to replicate in different nations like Mexico and Colombia.

Secondly, demographic and digitization tendencies within the area are sturdy, which ought to serve to bolster onboarding and utilization. Whereas some people nonetheless choose going right into a bodily financial institution, a digital-only strategy has solely lately turn into viable. Tailwinds in the direction of digitization are solely bettering, which ought to energy NU’s progress. Plus, over the long run, Latam has stronger fertility charges than most different geos, which ought to forestall demographic collapse considerations current in different developed markets.

Lastly, on a valuation foundation, the corporate is buying and selling at a nominally ‘costly’ ~6x gross sales (when in comparison with different monetary firms), however the progress and margins of NU extra intently mirror a fintech startup, which signifies that, in our view, NU’s inventory value is generally warranted / affordable.

NU Updates

So – the corporate is working from a robust base.

Nonetheless, lately NU launched Q1 ’24 earnings, which have pushed us to replace our view on the inventory as we speak.

At the start, the report was very sturdy on each prime and bottom-line outcomes, with enormous top-line progress of greater than 69% YoY. That is extraordinarily spectacular, and reveals how NU’s ‘land and develop’ enterprise mannequin works to first seize, then develop revenues on a per-customer foundation. Once more, these outcomes come on the heels of a robust model tailwind that pushes CAC down significantly.

On the web revenue entrance, issues have been rising much more rapidly. Adjusted internet revenue for Q1 got here in at 442 million, which, on a gross sales base of $2.73 billion, implies a internet margin of 16%.

Development sensible, adjusted internet revenue YoY has come from $187 million to the $442 million determine, which suggests revenue progress of greater than 135%, which is extraordinarily spectacular.

As a result of internet revenue is rising extra rapidly than revenues, it signifies that margins have been rising considerably over the previous few quarters, cementing NU’s general profitability inflection:

It appears to be like like this stage of profitability is right here to remain, and even probably develop a bit extra over the approaching years.

Zooming out a bit, you can even see this accelerating internet revenue progress within the inexperienced line under:

High-line outcomes are increasing as anticipated, however this TTM internet revenue progress acceleration is admittedly what has us excited.

Powering this success are large strides in deeper monetization and new geographies.

On the monetization facet, new product adoption is accelerating, which reveals simply how sturdy NU’s provide is to shoppers, along with how rapidly new prospects are increasing product use:

This information is extremely bullish for the corporate, and is accountable for an excellent chunk of the revenue progress we have seen thus far in 2024.

On the brand new geographies facet, the corporate additionally notched a giant win, with 1.6 million in internet provides for the quarter in Mexico, a huge growth geo for the company:

The sequential acceleration of buyer net-adds in Mexico, amounting to just about 1.5 million within the quarter, contributed to a complete of 6.6 million at quarter-end. This highlights the success of Nu’s pricing technique following the launch of Cuenta in Mexico, affirming the effectiveness of the playbook for driving accelerated buyer growth.

In different phrases, the NU playbook has proven that it’s working in Mexico, which, to us, was one of many largest questions surrounding the inventory. Now, with inexperienced shoots on this (and different) geos like Colombia, we predict that the perceived threat of execution in all of Latam has decreased considerably.

This could contribute to the corporate’s financials over time because the TAM will get greater, nevertheless it must also influence the corporate’s premium from a valuation perspective.

Valuation

As the corporate’s growth efforts seem like paying off, we consider that the premium the inventory has loved thus far may very well not be sufficient relating to the extent of potential future progress and profitability exhibited by NU.

Proper now, on a gross sales foundation, NU trades at a few 6.8x gross sales a number of. That is a lot, rather more costly than different banks, provided that the common financials inventory within the U.S. trades at roughly 2.2x gross sales.

This 6.8x a number of is definitely extra consistent with excessive progress tech firms, which seems extra becoming given NU’s monetary profile:

For us, if we’re ‘honest worth’ for NU’s inventory, on the low facet, it is in all probability value about $15, and about $18 on the excessive facet, one yr out, as you possibly can see above. This vary bakes in some room within the a number of on both facet ought to issues proceed as they are going now.

Nonetheless, over the long run, we predict it is potential that NU’s a number of may develop to 8x gross sales on common, which might indicate a value of about $20 as of mid-2025:

Thus, given the inventory value proper now round $12.50 per share, we see upside in the direction of the $18-$20 vary over the following twelve months, which might symbolize upside of 40%-60%.

In our view, it is difficult to seek out one other inventory that we now have this stage of conviction on over the following yr. There are names that we see having extra potential upside, however none that we now have as excessive a conviction on as NU.

Dangers

That stated, as all the time, there are some dangers to pay attention to.

First off, the financial institution does enterprise in FX, and bringing these earnings ‘residence’ to U.S. traders could also be difficult if the USD stays sturdy or strengthens. Forex headwinds like these may crop up and stifle revenue progress, which might influence the inventory.

Moreover, the considerably nominally costly a number of may show to be a problem in a downturn. If traders bitter on ‘costly’ firms, like they did in 2022, then NU may see a fabric decline within the share value, even when the corporate’s underlying outcomes proceed to enhance.

Lastly, there’s all the time a stage of execution threat that you just take when investing in an organization. If NU stops rising or producing the outcomes that they’ve proven of their observe document thus far, administration might turn into onerous to belief, which might doubtless influence the inventory materially to the draw back.

Abstract

That stated, whereas there are some dangers to pay attention to, finally, we’re bullish on this spectacular, world-class fintech firm.

It is rising like a weed, churning out revenue, and shares may see further upside via margin growth, in addition to natural monetary progress over the approaching yr or two.

To us, it stays a ‘Robust Purchase’.

Cheers!