Expansion Into Secured Lending And New Services Will Strengthen Future Prospects

Key Takeaways

• Expansion into secured lending and new markets aims to diversify and enhance revenue streams, improving financial resilience and liquidity.
  
• Investment in products and technology, maintaining low service costs, seeks to broaden market reach and enhance profitability.
  
• Nu Holdings faces execution risks and profitability challenges due to non-IFRS measures, expansion efforts, international ventures, and competitive macroeconomic pressures.

Catalysts

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

• Continued customer acquisition, especially in Mexico and Colombia, is expected to significantly increase revenue through a larger customer base that can be monetized over time.
  
• Expansion into secured lending in Brazil, including payroll and FGTS loans, aims to diversify revenue streams and enhance net margins, given the lower risk and cost of funds associated with secured loans.
  
• Strong deposit growth, particularly in new markets like Mexico and Colombia, is planned to bolster financial resilience and liquidity, potentially improving net interest margins as these deposits are deployed into lending.
  
• Investment in expanding product offerings, such as Nu Marketplace, Nu Travel, and telecom services, is anticipated to broaden Nu's addressable market and increase ARPAC, thereby boosting revenue.
  
• Technological advancements and efficiency improvements, emphasized by maintaining a cost to serve per active customer at or below $1, are intended to improve operating margins, enhancing overall profitability.

Nu Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nu Holdings's revenue will grow by 68.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 35.8% today to 20.7% in 3 years time.
• Analysts expect earnings to reach $5.4 billion (and earnings per share of $1.09) by about March 2028, up from $2.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $6.6 billion in earnings, and the most bearish expecting $4.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.1x on those 2028 earnings, down from 26.4x today. This future PE is greater than the current PE for the US Banks industry at 11.3x.
• Analysts expect the number of shares outstanding to grow by 0.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.89%, as per the Simply Wall St company report.

Nu Holdings Future Earnings Per Share Growth

Risks

• Nu Holdings is employing non-IFRS financial measures, which might make it challenging to precisely assess and compare its financial performance with other companies adhering strictly to IFRS standards, potentially impacting investor confidence in its reported earnings.
  
• The company's expansion into new products and regions, such as new secured lending initiatives and the launch of NuCel, though promising, also carries execution risks that could affect revenue and net margins if market penetration or consumer adoption is lower than anticipated.
  
• The pursuit of new secured lending markets, while potentially lucrative due to lower risk, results in lower net interest margins compared to unsecured lending, which may affect overall profitability and net income.
  
• Expanding internationally beyond Brazil, Mexico, and Colombia, while diversifying revenue sources, involves significant investment and an element of uncertainty; unsuccessful international ventures could result in financial strain or losses, impacting net earnings.
  
• Increasing competition and the macroeconomic environment, specifically in markets like Brazil where they are already heavily invested, may constrain revenue growth and introduce higher credit risk, impacting net margins and overall profitability.

Valuation

• The analysts have a consensus price target of $14.563 for Nu Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $18.9, and the most bearish reporting a price target of just $9.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $26.3 billion, earnings will come to $5.4 billion, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of $10.81, the analyst price target of $14.56 is 25.8% higher.
  
• 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.