Service Expansion And Optimized Lending Will Improve Profitability And Stabilize Margins

Key Takeaways

• Expansion into telecom and diverse services bolsters revenue streams, reducing reliance on credit and stabilizing margins.
  
• Strategic growth and optimized lending improve asset quality, enhance net interest margin, and increase profitability.
  
• Expansion into new verticals beyond financial services risks profitability issues and integration challenges, potentially affecting net margins and execution success.

Catalysts

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

• Nu Holdings' expansion into telecom services with NuCel, alongside developments in NuMarketplace, NuTravel, and NuPay, is expected to enhance cross-selling opportunities and diversify revenue streams, potentially increasing revenue and stabilizing margins as the business model becomes less reliant on credit.
  
• The strong customer growth in Brazil, Mexico, and Colombia, accompanied by cross-selling and higher product adoption, creates potential for increased Average Revenue Per Active Customer (ARPAC) over time, directly impacting future revenue growth.
  
• The increase in secured lending within the portfolio, alongside robust credit underwriting, positions Nu Holdings to optimize asset quality and yield improved risk-adjusted returns, ultimately benefiting net interest margins and profitability.
  
• The potential decrease in funding costs in Mexico and Colombia as deposit rates are optimized, combined with continued loan growth, is likely to increase the net interest margin and improve earnings.
  
• The shift from treasury bonds to credit assets indicates an opportunity for Nu Holdings to leverage balance sheet capacity more effectively, which is expected to enhance net interest margin and boost earnings over the long term.

Nu Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nu Holdings's revenue will grow by 70.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 32.6% today to 20.7% in 3 years time.
• Analysts expect earnings to reach $5.6 billion (and earnings per share of $1.1) by about December 2027, up from $1.8 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.3x on those 2027 earnings, down from 31.6x today. This future PE is greater than the current PE for the US Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 1.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.85%, as per the Simply Wall St company report.

Nu Holdings Future Earnings Per Share Growth

Risks

• The company's reliance on non-IFRS financial metrics may obscure certain financial vulnerabilities, potentially impacting investor confidence and the transparency of future earnings.
  
• The strategy to expand into new verticals beyond financial services, such as telecom and marketplace, introduces execution risk and may not achieve the desired profitability or integration, possibly affecting net margins.
  
• The shift towards secured lending, which typically offers lower yields compared to unsecured loans, could put pressure on net interest margins, impacting overall profitability.
  
• The exposure to FX fluctuations and the impact of higher funding costs in newer geos like Mexico and Colombia could compress net interest margins and affect net income.
  
• Heightened competition and market saturation in Brazil's credit card market may stabilize active card growth, potentially limiting future revenue expansion opportunities.

Valuation

• The analysts have a consensus price target of $15.64 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 $19.0, 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 2027, revenues will be $26.9 billion, earnings will come to $5.6 billion, and it would be trading on a PE ratio of 18.3x, assuming you use a discount rate of 8.9%.
• Given the current share price of $11.7, the analyst's price target of $15.64 is 25.2% 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.