Latin American Expansion And Rising Regulations Will Undermine Stability

Key Takeaways

• Expansion into riskier, underserved markets raises the likelihood of higher credit losses and shrinking profitability as macroeconomic volatility persists.
  
• Intensifying competition, new regulations, and disruptive payment technologies threaten growth, increase costs, and may erode Nu Holdings' revenue streams and market share.
  
• Dynamic customer growth, disciplined cost control, geographic and product expansion, and strong risk management drive Nu Holdings' resilience and position it for sustained revenue and profitability gains.

Catalysts

Provides digital banking platform in Brazil, Mexico, Colombia, the Cayman Islands, and the United States.

• As the company continues aggressive expansion into less-banked and lower-income segments across Latin America, there is heightened risk of mispricing credit and underestimating losses, particularly as global and regional macroeconomic volatility increases; this can lead to structurally higher credit loss allowances and compress risk-adjusted net interest margins over time.
  
• With traditional banks and new fintech competitors ramping up investments in digital offerings, Nu Holdings' early-mover advantage is eroding, making it increasingly difficult to sustain elevated double-digit revenue and user growth; greater competition is likely to drive up customer acquisition costs and pressure net margins as differentiation narrows.
  
• Regulatory tightening in Latin American banking, including stricter capital and lending guidelines and rising data privacy compliance requirements, will increase the company's operational costs and reduce flexibility in credit origination, directly weighing on future profitability and elevating the risk of net income declining from current high levels.
  
• The accelerating global roll-out of central bank digital currencies and evolving payment infrastructures threatens to disintermediate digital-first banks, potentially reducing Nu Holdings' share of payment and deposit volumes and undercutting long-term revenue streams from transaction fees and float.
  
• Ongoing geopolitical instability, potential currency crises, and rising interest rate cycles across Latin America could severely impair Nu Holdings' access to affordable funding, result in volatility in reported results, and dramatically reduce consumer demand and credit quality, thereby undermining both top-line growth and long-term earnings power.

Nu Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Nu Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Nu Holdings's revenue will grow by 57.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 39.3% today to 19.2% in 3 years time.
• The bearish analysts expect earnings to reach $4.4 billion (and earnings per share of $0.9) by about August 2028, up from $2.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.3x on those 2028 earnings, down from 27.5x today. This future PE is greater than the current PE for the US Banks industry at 11.4x.
• Analysts expect the number of shares outstanding to grow by 0.91% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.69%, as per the Simply Wall St company report.

Nu Holdings Future Earnings Per Share Growth

Risks

• Sustained strong customer growth, with Nu Holdings expanding to nearly 123 million customers and maintaining an activity rate above 83 percent, creates a positive compounding effect on revenue and user engagement, which may drive earnings and top line growth despite concerns about market saturation.
  
• Rapid geographical expansion into Mexico and Colombia, where Nu now serves approximately 13 percent of adults in Mexico and 10 percent in Colombia, demonstrates the successful scaling of its technology-driven model and opens large new markets, potentially leading to higher future revenue and profit margins.
  
• Low and stable operating costs, with a cost to serve of just $0.80 per active customer and expanding ARPAC for mature cohorts reaching $27.3 per customer, continue to improve operating leverage and net margins as the company scales.
  
• Ongoing diversification of the credit portfolio across secured and unsecured lending, along with robust risk management and credit models that front-load provisions, provides resilience against credit cycles and supports stable or rising net income as Nu leverages strong loan growth.
  
• Launching new products (such as transactional financing, AI-based credit solutions, and expanded deposit features) alongside a world-class management team focused on innovation and internationalization increases average revenue per user and positions Nu Holdings for long-term revenue and margin expansion.

Valuation

• The assumed bearish price target for Nu Holdings is $9.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Nu Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $20.0, and the most bearish reporting a price target of just $9.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $22.7 billion, earnings will come to $4.4 billion, and it would be trading on a PE ratio of 14.3x, assuming you use a discount rate of 11.7%.
  
• Given the current share price of $13.1, the bearish analyst price target of $9.0 is 45.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.