Warren Buffett isn’t well known for investing in particularly innovative or disruptive businesses that are registering tremendous growth. However, this is exactly what Berkshire Hathaway is doing with its stake in Nu Holdings (NU 2.88%), a company whose shares the conglomerate purchased during its initial public offering in December 2021.
From the start of 2023 to the peak in November 2024, Nu was a wildly successful investment, with shares up 290%. But the market is adopting a pessimistic view these days, and the stock was down 37% as of April 9. Should investors still buy this fintech?
Serving a crucial need
Latin America has a sizable population that is unbanked (35% with no bank account) and underbanked (42% without a credit card), according to 2023 data from the Boston Consulting Group. Nu is trying to solve this problem.
With a presence in Brazil, Mexico, and Colombia, the business offers its customers various financial services, like checking/savings accounts, credit cards, investment and insurance products, and loans. Management says Nu is the largest digital banking platform in the world outside of Asia.
That digital aspect is important. Nu doesn’t operate physical bank branches. Instead, it leans heavily on technological capabilities to provide its users with an easy-to-use platform. As smartphone and internet penetration increase in Latin America, Nu benefits from a more accommodating environment to further grow.
The fintech saw its revenue rise 43% in 2024 to $11.5 billion. That number was 576% higher than three years ago, indicating rapid expansion. Clearly, Nu is resonating with its 114 million customers, which are more than double from the end of 2021.
Top-line growth has helped drive better profitability. Net income soared 110% year over year in 2024, leading to margin expansion. Its scalable business model is showing signs of life.
Nu’s unit economics (the financial profile of serving each customer) are superb. The average revenue per customer was $10.70 in the fourth quarter, comparing very favorably to the $0.80 average cost to serve them. Improving brand recognition and successfully cross-selling added products could further support this trend.
Building a competitive strength
Buffett’s investing philosophy centers on owning companies that have an economic moat, or durable competitive advantages. Nu might be developing its own key strength.
Successful banks benefit from switching costs. View this situation from the perspective of the customer: If you have long held a checking or savings account at one institution, and you have these linked elsewhere, it’s unlikely you will close those accounts and go elsewhere. Also consider the oldest credit card in your wallet, which you might have had for a decade or more.
Nu is a young business, having been founded in 2013. But it’s likely developing switching costs with its customers. The added benefit for the company is the ability to develop long-term relationships and to cross-sell added offerings over time, resulting in more revenue opportunities.
Its customers on average use about four products, with newer cohorts signing up for new offerings at a faster rate than older cohorts. This can lead to customer stickiness.
Well off its peak
As of this writing, the stock is down 37% from its record. A general risk-off sentiment from investors, higher interest rates in Brazil, and the fact that Berkshire sold some of its position in the last six months of 2024 might be scaring investors.
The market might be pessimistic right now, but this means that the valuation is more compelling. Investors can scoop up shares at a forward price-to-earnings ratio of only 17.7. The stock has rarely been cheaper in the past couple of years.
Investors should continue to expect volatility along the way. However, starting a small position in Nu Holdings could boost your portfolio’s returns over the next five years.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.