Customer Expansion Will Open Prospects In Mexico And Brazil

Key Takeaways

• Strategic growth in Mexico and Brazil enhances potential earnings and stabilizes net interest margins with expanded customer base and secured lending.
  
• Ecosystem diversification through initiatives like NuCel and Nu Travel is poised to boost revenue growth and average revenue per active customer.
  
• Strategic focus on long-term growth and customer experience could affect short-term earnings amid macroeconomic uncertainties and operational inefficiencies.

Catalysts

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

• Nu Holdings is experiencing rapid customer growth across its markets, particularly in Mexico where customer numbers increased by 91% year-over-year, boosting their potential future earnings from an expanding customer base.
  
• The company's deposit growth, notably a 438% increase in Mexico, improves its liquidity and supports prudent credit expansion, likely bolstering future net margins and profitability.
  
• The significant improvements in Nu's risk models have enhanced their credit approval rates by 10% in Mexico, potentially leading to improved revenue through higher net interest income from a more robust lending portfolio.
  
• Strategic expansion into secured lending in Brazil, evidenced by a 615% portfolio growth, allows Nu to tap into high-demand credit markets with lower risk, thus enhancing its future earnings stability and net interest margins.
  
• The development of additional revenue streams like NuCel and Nu Travel expands its ecosystem, setting the stage for diversified revenue growth and higher ARPAC (average revenue per active customer) in the long run.

Nu Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Nu Holdings compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Nu Holdings's revenue will grow by 76.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 38.1% today to 23.8% in 3 years time.
• The bullish analysts expect earnings to reach $7.4 billion (and earnings per share of $1.47) by about August 2028, up from $2.2 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 bullish analyst cohort, the company would need to trade at a PE ratio of 17.6x on those 2028 earnings, down from 27.3x today. This future PE is greater than the current PE for the US Banks industry at 11.1x.
• Analysts expect the number of shares outstanding to grow by 0.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.76%, as per the Simply Wall St company report.

Nu Holdings Future Earnings Per Share Growth

Risks

• The discussion noted potential impacts of second order effects related to Pix financing, such as deteriorations in Net Promoter Scores, churn, and engagement, which may affect its overall profitability and customer retention.
  
• A cautious approach is being taken towards lending expansion due to macroeconomic uncertainties in Brazil, which could impact credit risk and portfolio performance, potentially affecting net income margins.
  
• Increased funding costs in Mexico and Colombia, where deposit rates remain higher than benchmark rates, have affected net interest margins and pose a risk to profitability.
  
• Nu Holdings has a low loan-to-deposit ratio, which highlights an inefficiency in capital utilization and could impact earnings if not optimized with increased lending activities.
  
• There is a strategic focus on long-term growth and customer experience over immediate profitability, exemplified by the deliberate tempering of Pix financing eligibility, which might reduce short-term earnings.

Valuation

• The assumed bullish price target for Nu Holdings is $19.0, which is the highest 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 bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $19.0, and the most bearish reporting a price target of just $9.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $31.1 billion, earnings will come to $7.4 billion, and it would be trading on a PE ratio of 17.6x, assuming you use a discount rate of 11.8%.
• Given the current share price of $12.15, the bullish analyst price target of $19.0 is 36.1% 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.