Almost all companies that went public in 2021 fell shortly thereafter, and Nu Holdings (NU -1.69%) was no exception. When the Latin American fintech's stock started trading on Dec. 9, 2021, it opened at 25% above its IPO price of $9. Since then, however, it has fallen below $8.
Nu Holdings has caught the eye of many highly regarded investment firms. Warren Buffett's Berkshire Hathaway (BRK.A 1.18%) (BRK.B 1.30%) invested $500 million before it went public, alongside venture firms like Sequoia Capital and the Chinese giant Tencent. Are these big-name backings a sign that Nu Holdings is worth putting in your portfolio? Let's find out.
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A Latin American fintech
Nu Holdings is the holding company for Nubank -- a leading fintech platform looking to revolutionize personal finance in Latin America. The company is rapidly becoming a leading digital bank in Brazil, Colombia, and Mexico by providing nearly every service a consumer might need: mobile wallet, credit cards, investment accounts, lending, and even insurance. With a wide range of offerings and an innovative approach to banking, Nu has attracted more than 48 million users, and it's used by 28% of Brazilians who are 15 or older.
In Latin America, the banking industry is run by an oligopoly of five banks that control 70% to 85% of loans, deposits, and overall banking revenue. This has meant that the region has experienced almost zero innovation, resulting in poor service and frustrated consumers.
The median number of complaints about the top seven banking incumbents per 1 million customers was roughly 1,420 in the first half of 2020, but Nu is trying to change this. It had just 269 complaints per 1 million customers over the same period, and Nu's Net Promoter Score -- a score from -100 to 100 based on customer satisfaction, with a score of 70 being considered "world-class" -- was 90. The company has saved customers $4.8 billion in bank fees and 113 million hours in wait time.
Banking is still a service that not all people have in Latin America, but Nubank is changing that: 5.1 million customers used Nubank for their first bank account or credit card. With its relentless focus on digital access and customer satisfaction, Nu has been able to finally break through and take meaningful market share from the incumbents. The company's customer count grew an average of 110% annually over the past three years.
Opportunities and risks
Nubank still has tremendous growth potential ahead. With 48 million customers, Nu has just 7% of the 652 million Latin American population on its platform -- signaling strong potential despite its existing growth. Nu's addressable market stands at nearly $1 trillion, much higher than the $1 billion it made in revenue over the first nine months of 2021.
Latin America is also one of the fastest-growing economies in the world, and one that is rapidly adopting technology. Fintechs and digital banks are expected to take 13% market share by 2025 in Brazil alone, and considering that Nu is one of the leading digital banks in the region, it has a good chance to take the majority of that market share.
There are some risks with Nu, however. In the first nine months of 2021, the company had a net loss of $99 million and free cash flow of negative $1 billion. The net loss is not a major concern, since a growing top line means it's becoming a smaller percentage of revenue. But the cash burn is concerning, since the company had $2 billion total on its books at the end of the third quarter.
There are also no guarantees that Nu will continue to see this adoption. The company is trying to beat the financial oligopoly that has prevailed for decades. Additionally, most of Nu's revenue comes from its loans and credit cards, making it vulnerable to failure during economic turmoil or a recession.
Is it a buy?
Nubank has executed flawlessly and is seeing success in an industry in major need of disruption. More importantly, it is succeeding at making its customers happy and financially better off, which will likely lead to lower churn. The company also has plenty of room for growth -- a great sign for future success. However, this company is risky. With such a reliance on loans and credit cards, it could be hurt during recessions, and Latin America is a notoriously volatile economic environment. And the stock is expensive -- trading for more than 50 times trailing-12-month sales at recent prices.
I will watch Nu closely for a few quarters to see if it can sustain its growth as a public company. I would also be able to get a better financial picture of Nu the longer it is publicly traded, but this company certainly has promise. While not a buy today, this company could easily be investable before the end of 2022.
