Nu Holdings (NYSE: NU), the company that runs Nubank, is an interesting perspective on markets playing in emerging markets. The game here is not that different from a company like Qudian (NYSE: QD), minus the risks that exist in Chinese markets around equity ownership and high rate regulation. However, in addition to the opportunity of AI-powered online banking and the open scope of unbanked populations, Nubank has tapped into a very compelling ecosystem concept that interacts well with the other factors that make Nubank appealing. With results continuing to be proven on today’s fourth quarter call, we believe in the ROI of customer acquisition in this big money consuming business, and note that reflexivity could play a role. an important role in the company’s success, helped in part by being Buffett and Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) supported.
Q4 proves the ecosystem
The Q4 is attractive. Maturities are short on credit cards and bank loans, and high APRs mean that together there is rapid and substantial loan repayment to these otherwise unbanked customers. This open field means that Nubank is the first player in digital retail banking and has become the largest bank in Brazil with users using the different products offered by Nubank, including mobile payments, personal loans, credit cards and even investment accounts. Opportunities are also plentiful in short-term consumer credit, with merchant partnerships going well and part of the business emulating Klarna’s well-received concept.
Indeed, Nubank is in time for some major trends we are seeing among the younger middle class in emerging markets. Greater involvement of younger retail investors in the market is certainly something Nu has captured with its acquisition of Easynvest. With multiple asset classes now available to Nu clients, including crypto which is an area that N26 and others have surely regretted not investing in, Nu is beginning to position itself as the Robinhood (NASDAQ: HOOD) from Latin America.
The ecosystem not only makes the model more defensive and returns on investment on customer acquisition higher through cross-selling opportunities, which are harvested quite quickly from the first engagement, but it also serves as an attraction in a domain where traditional banking bureaucracy keeps much of the services needed to financially empower itself, creating a large unbanked population. Frankly, there is not much cost and value competition with traditional banks in the regions where Nubank operates.
Deposits are also growing rapidly in Nubank’s traditional business thanks to banking licenses in Brazil and inbound licenses in other LatAm markets. Along with fundamental growth as a more fledgling business reaches scale, and where that scale multiplies and accelerates the flywheel due to cross-selling opportunities and rapidly expanding customer data on which to form scalable credit models.
Reflexivity and Valorization
Although Nu’s markets are quite large, so are its already existing active users. 41 million people is a lot, with current markets realistically containing around 500 million people depending on how Nu grows in other markets. 10% is already decent penetration, so sustained, long-term growth here will have to come from the ecosystem and greater cross-selling. Given that the growth is as recent as this quarter, the maturity of customers in recent cohorts to become more involved in the ecosystem has yet to be seen, and indeed 10% penetration is still quite low, from so revenue growth is expected to continue, but we expect that in the next 2 years we will see diminishing marginal returns. Mexico and Colombia are still only 1% penetrated, with almost all users being Brazilian, so we don’t want to underestimate the significant growth that is coming.
Although the company is already achieving significant results, the company has yet to benefit from reflexivity. With a flywheel model due to network effects in the AI-based backend on many products, but also because Nubank is positioning itself to work with merchants and expand the products offered in their marketplace, it there’s a lot of value in being wrung out of embedded clients. Marketing spend is increasing and cash is still burnt with capital raising likely to continue for some time to also expand the lending business so funding conditions will hopefully remain good at the multiple of 30 on revenue to mean minimum dilution sacrifice in exchange for onboarding high LTV customers.
While advances in Mexico and Colombia have barely begun, marketing spend is only increasing, and funded by stock backed by a strong institutional presence with Buffett, mainstream players are scared and even abandoned ship. With the mature client providing an average income per quarter of $15, at least 3x return on investment if not 12x assuming clients stay for a year, a conservative assumption, reinvestment rates are superb right now. Flywheel patterns mean win-win dynamics, and Nubank being a frontrunner can justify a high multiple, with growth rates above 200% likely to compress that 30x P/S multiple pretty quickly to higher levels. reasonable.
Although with consumer finance companies like Klarna- faced by customers with similar credit profiles and services that Nubank is beginning to offer in partnership with merchants – valued around 45x, the multiple is already looking attractive. With operating leverage and profitability just a few years away, and growth rates likely to hold up a bit longer with large Colombian and Mexican populations still barely reached, you can start to be optimistic about a SPY list, and that will only increase liquidity. We are bullish on Nubank, of course. The main risks are that this is a growth-style company, and market jitters could divert favors from them to more valuable names; and with reflexivity cutting in both directions, the company’s reinvestment rates would suffer from the deterioration in financing conditions. But with growth having already taken a recent hit, we think Nubank is on a roll.