Summary Nu is a crypto-friendly bank operating in Brazil. It is growing at a fast click and also increasing profitability. Now could be the right time to invest in emerging markets, especially Brazil. Company Overview Nubank ( NU ) is a recently IPO'd company operating in Brazil and a few other South American companies. This "neobank" jumped into the scene by offering consumer credit cards. While this may hardly seem like an innovation, we have to understand that a large population of Brazil has been underserved in this sector. Wealth inequalities are large in South American countries, and a large part of the population, traditionally, did not have access to financing options like credit cards. The bank makes most of its income from interest charged on its credit cards but has expanded its offerings into other banking segments, such as regular loans and insurance. There's a lot to like about NU since it is growing at a fast rate and increasing its profitability. On top of that though, I am particularly fond of the bank's crypto-friendliness and the fact that Warren Buffett owns this stock. Nubank has its own cryptocurrency in the works, Nucoin. It is currently being beta tested but will serve in the future as means to extend discounts and other offerings to its customers. While I don't think this is anything revolutionary or game-changing, Nubank is making the right moves in a market that could really benefit from a more modern, democratic, and accessible form of banking. Recent Results The company has just released its fourth-quarter results for the year, delivering a revenue beat and showing very promising trends in customer growth, revenue, and profitability. Revenue, costs and profits (Investor slides) Nubank posted a 112% YoY revenue growth on an FX-neutral basis and a 137% increase in net profit. The company actually posted a Net Income of $58 million, though this includes the adjusting for a "one-time non-cash recognition of the 2021 CSA termination in the amount of $355.6 million." NU Financial Summary (Investor slides) Not only did Nubank increase its number of customers, but it also managed to increase the activity rate of its customers, and deposit growth even outpaced customer growth. The increased activity is reflected in how Nu has been able to successfully cross-sell its products, increasing Average Revenue Per Active User in the process. NU ARPA (Investor slides) We can see that Nu customers are using other products with time and that monthly ARPAC is growing. It's also worth mentioning that Monthly Average Cost to Serve Per Active Customer remained flat at $0.9 on a YoY basis. NU operating leverage (Investor slides) And not only that, but the company has also substantially increased its Net Interest Income Margin, which speaks volumes of just how profitable Nubank could become. Outlook and Valuation Nubank is in a great position right now. It has found itself a spot in the market and is using that to expand its offerings to the rest of Latin America. Let's not forget that Brazil has a population of $214 million, and Nubank is expanding into Mexico and Colombia, finding similar success so far in those markets. Banking-as-a-service in LatAM is expected to deliver a 20.2% CAGR from 2023-2027, so Nu has plenty of growth to top into. Current EPS estimates show that the company should begin turning a profit in 2023. NU EPS ((SA)) Estimates also show that revenue growth over the next three years should average almost 30%. NU revenues ((SA)) Nu currently trades at a P/S ratio of 12, but the forward price ratio seems a lot more reasonable. Using these revenue estimates, assuming that by 2024 Nu can command a P/S of 6, the price target would be $10.14 by December 2024. I believe this would be a fair multiple since it is reasonable to believe that the multiple should contract but still reflect the fast growth of revenues. Technical Analysis If we look at a possible Elliott Wave path for Nu, a $10 price tag also seems quite achievable in the coming years. NU TA (Author's work) This type of analysis is harder to do on companies with a short price history. However, if NU manages to hold the lows it made at $3,40 then we could argue that the stock has put in an I-II structure, which could be the beginning of an impulse that could take us north of $11 in the large degree wave III. For now, I think we could see a significant retracement in wave 2, so I will set some buy orders around the $4,5 area, just above the 50% retracement of the recent rally. Risks and Other Considerations Now, we can't finish this article without addressing the elephant in the room. Nu operates mostly in Brazil, a country which has been troubled by political instability and inflation. If Nu was an American company, buying it would be a no-brainer, but it is not. Having said this, there is reason to believe that Brazil's economy could perform well in the coming years. Politically, the country has just undergone a tumultuous transition of power, but the worst is behind us. Lula is now president, and though some investors could view this as bad news for the market, the Brazilian Central Bank has come out vigorously in defense of its fight against inflation, despite this going against Lula's intentions. In what could be described as a bold move, the president of the Central Bank gave a long interview on TV to address the public's concerns. In a rare two-hour television appearance, Campos Neto, 53, took a battery of tough questions from six reporters and walked a diplomatic tightrope. He expressed a desire for good relations with Lula's economic team while refusing to cave on two of its central demands: to cut interest rates and raise the inflation target. Based on the positive market reaction the following morning, his gamble paid off. Source: bnnbloomberg.ca The Brazilian real has stood strong against the dollar, and with Brazil's interest rate at 13.75%, inflation should continue to cool off. Overall, I believe the dollar will weaken in the coming months, following a strong rally in 2022. This should help emerging markets, which seems to already be a consensus trade in 2023 , with investors pouring $1 billion into them. Takeaway In conclusion, Nu is showing promising results and taking the right approach in a key market in Latin America. Nubank is bringing banking to the people, and it is not afraid to make use of new technologies, like blockchain and crypto in the process. Brazil is a risky bet, but one that could pay off well.
