Nu Holdings Ltd. (NYSE:NU) shares have been a roaring success over the past year, with the stock consistently posting higher highs and outperforming its exponential moving averages over multiple time periods. However, the company’s meteoric rise, excellent fundamentals, promising outlook, and strong technical indicators suggest otherwise.
Nu Bank, through its parent company, has quickly become one of the fastest-growing digital banking platforms, serving over 100 million customers. The majority of its business is generated in Brazil, with significant contributions coming from Colombia and Mexico. The company already controls around 50% of the Brazilian market, but still has an exceptional growth trajectory ahead of it. In addition, its foray into the fast-growing markets of Colombia and Mexico is expected to significantly increase its revenue in the coming years.
In addition, the company offers a comprehensive range of financial products, ranging from credit cards to personal loans and insurance, accessible through a mobile interface. Low costs, transparency and a customer-centric strategy further add to its appeal. Not surprisingly, Nu Holdings has caught the attention of legendary investors such as Warren Buffett (Trades, Portfolio). The stock currently represents about 0.50% of his massive $280 billion equity portfolio.
Therefore, there is a lot to be positive about the company when we dig deeper into its compelling growth story. According to my analysis, the stock has double-digit upside potential from the current price before it enters correction territory.
As mentioned earlier, Nu Bank has grown significantly in recent years, with its total revenue increasing from $327.20 million in 2019 to a whopping $3.70 billion last year. The impact is perhaps even more noticeable in net profit, which swung from a loss of $92.50 million to an impressive profit of $1.03 billion last year. These remarkable results are due to a sharp increase in customer numbers and significant improvements in key performance indicators.
Source: Nu Holdings second quarter earnings summary
The snapshot from NU Holding’s second quarter earnings statement highlights the company’s rapid expansion. The company has reached 104.50 million customers, an increase of 20.80 million year-on-year. In addition, the platform serves 56% of Brazil’s adult population with a remarkable monthly activity rate of 83%. Since 2014, the customer base has grown continuously, consolidating the company’s market position while accelerating expansion in key Latin American markets.
Operating results have been extremely promising recently, with the company consistently beating revenue expectations over the past five quarters. While the same cannot be said for earnings growth, which has only been beaten twice, recent results have been particularly encouraging, with a one-cent gain.
Looking closer, Nu reported revenue of $2.85 billion for the quarter, beating consensus estimates of $2.81 billion. In addition, the company reported adjusted net income of $563 million and added 5.20 million new customers. One of the highlights of the quarter was net interest income, which increased 77% to reach a record $1.70 billion thanks to healthy growth in its credit card and loan portfolios. Gross profit reached a new quarterly high of $1.40 billion, with 88% year-over-year growth resulting in an excellent profit margin of 48%.
Furthermore, if we look at NU’s financial breakdown for 2020 and 2023, we see a sharp increase in the bank’s net interest income, which increased from $167.80 million (46.60% of revenue) to $4.40 billion (78.20% of revenue).
This rapid increase is due to the increase in interest rates in Brazil, which significantly increased the profitability of the bank’s credit and loan operations. The following graph shows a sharp increase in interest rates over the last three years, which contributed enormously to the increase in the bank’s revenue and profit.
Source: Focus Economics
In addition, interest rates in Brazil are expected to remain high in the future, with the Selic benchmark interest rate expected to reach 10 percent in December next year, an increase of 25 basis points from the previously expected 9.75 percent.
Nu Holdings stock, as mentioned, has gained ground over the past 12 months. What’s more, shares are up over 73% year-to-date, dwarfing the S&P 500’s 18% gain.
The chart below illustrates the stock’s momentum over the past year using exponential moving averages and closing prices. EMAs are a variation of moving averages that give more weight to recent prices. As we can see, the 12-day EMA has been hovering above the longer-term EMAs (26-day, 50-day, and 200-day EMAs) most of the time, indicating bullish momentum. Moreover, the stock has been consistently closing above its short-term and long-term EMAs, indicating robust upside momentum.
Source: Author created based on historical data
The Moving Average Convergence Divergence and Signal Line chart for Nu confirms the bullish trend. The MACD line helps identify short-term momentum in a particular stock, while the Signal Line helps identify buying opportunities.
Source: Author created based on historical data
The chart shows a downward move where the MACD fell below the signal line. However, we recently observed a strong upward rebound in the MACD, which crossed above the signal line by a considerable distance, indicating a bullish reversal. As expected, the Relative Strength Index crossed above the overbought threshold of 70, indicating limited upside potential.
In addition, the stock appears to be slightly undervalued with a GF Value of USD 16.82.
Nu Holdings is a giant in the fintech space and has established itself as a dominant force in the digital banking landscape. Its rapid expansion in Brazil, Mexico and Colombia has led to a rapid increase in its customer base and business numbers. In addition, recent results have shown that the bank will continue to grow rapidly, with several catalysts in motion.
Looking ahead, a key focus will be to expand presence in high-growth markets while continuing to capitalize on the ongoing high interest rate environment in Brazil. Technically, the stock’s strong momentum, underlined by its consistent performance above the key EMAs and a bullish MACD reversal, suggests that there is still some upside potential in the stock.
However, despite the recent rise, the stock is moderately undervalued, with a GF reading of $16.82 suggesting further upside. Given these factors, Nu Holdings is well positioned to continue its upward trend and presents an attractive investment opportunity for those looking to invest in this rapidly evolving space.
This article first appeared on GuruFocus.
