65 Million Reasons to Invest in This Recent IPO Backed by Warren Buffett

The Brazilian digital bank Nu Holdings (NYSE: NU) went public in late 2021 with a whopping $41 billion valuation and backing from Warren Buffett and company, Berkshire Hathaway, as well as a number of large venture capital firms. Since then, however, the road has been anything but smooth, with the stock down around 50% this year at Friday prices.

Despite the stock’s performance, Nu continued to post solid growth and results that show clear progress in what the company is building. Now I think there are 65 million reasons to invest in Nu. Let me explain.

Incredible customer acquisition

Nu got its start by offering a slick digital experience that made banking easier for customers in Brazil – and at a much lower cost, as Nu offers products and services at a lower cost than traditional large Brazilian banks. As a result, Nu provided millions of customers with their very first credit cards and bank accounts. Today, digital banking is spreading like wildfire in Brazil and beginning to expand elsewhere in Latin America, a region many see as one of the next big banking markets, with more than 666 million people.

Image source: Motley Fool.

In its recent second-quarter earnings report, Nu said it now had more than 65 million customers and that banks accounted for about 36% of Brazil’s adult population. About 63.3 million of Nu’s customers are consumers and about 2 million are small and medium-sized businesses. That’s impressive growth for a company that was founded in 2014 and had just 6 million customers in 2018.

More than 52 million Nu customers in the second quarter were defined as monthly active customers – those who generated revenue for the company in the previous 30 calendar days. About 55% of these active customers use Nu as their primary bank.

What’s even more impressive is that much of this growth is organic, giving Nu an industry-lowest customer acquisition cost that management says was about $5 per customer. I can’t think of any other fintech company that I follow doing better than this.

Additionally, Nu’s service costs per active customer are approximately $0.80. Nu CFO Guilherme Marques do Lago said on the company’s recent earnings call that it’s around 85% lower than traditional banks, although management expects customer service costs to company increase to around 1 dollar in the future.

Nu is also beginning to expand into other parts of Latin America and is now the new No. 1 credit card issuer in Mexico (2.7 million cards) and Colombia (over 313,000).

Customer acquisition begins to translate

Nu’s strong customer acquisition capabilities are starting to translate into stronger financial results. In the second quarter, the fintech company generated record revenue of $1.2 billion, up 230% year-over-year. The company still lost about $30 million in the quarter, but on an adjusted basis excluding stock-based compensation, Nu generated adjusted earnings of $17 million. It’s similar year-over-year, but Nu also had about $17 million more in stock-based compensation in the quarter than in the second quarter of 2021.

In addition, Nu’s Brazilian business generated a book profit of $13 million in the first half of the year, and the company’s core credit card and personal loan products are also “very profitable”, according to The direction.

Nu’s incredible and efficient customer acquisition and huge market opportunity are probably the main reasons why Buffett and Berkshire are investing in Nu. Berkshire reportedly invested in Nu when the company was valued at around $30 billion, so investors have the option of buying that Buffett stock at a cheaper valuation than the Oracle of Omaha itself.

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Bram Berkowitz holds positions in Nu Holdings Ltd. The Motley Fool holds positions and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short puts in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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