Expanding In Brazil And Mexico Powers Revenue Surge And Market Impact

Key Takeaways

• Nu Holdings' expansion in Brazil and Mexico, alongside successful cross-selling and new product introductions, indicate strong future revenue and earnings growth potential.
  
• Achievements in operational efficiency and profitability, evidenced by growth in net income and a record return on equity, suggest enhanced earnings outlook.
  
• Expansion, aggressive growth, and investments in unprofitable markets alongside currency risks may significantly impact Nu Holdings' net margins and earnings.

Catalysts

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

• Nu Holdings' strategy to expand customer base and significantly improve its net customer additions, particularly in Brazil and Mexico, demonstrates its potential for further revenue growth and market penetration, impacting revenue positively.
  
• The successful cross-selling and upselling strategies, alongside the introduction of new products, have shown a substantial year-over-year revenue increase, suggesting a positive trajectory for future earnings and revenue growth.
  
• The notable growth in net income and the achievement of a record annualized return of equity indicate operational efficiency and profitability, likely enhancing earnings.
  
• Expansion of the consumer finance portfolio, especially in credit cards and lending sectors, driven by increases across product categories, suggests future growth in revenue through higher ARPAC levels and customer engagement.
  
• Improvement in net interest income (NII) and net interest margins (NIM), due to expanding credit card and lending products, signifies potential for further increases in revenue and net margins, bolstered by operational leverage and efficient balance sheet management.

Assumptions

• Analysts are assuming Nu Holdings's revenue will grow by 66.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 31.2% today to 21.0% in 3 years time.
• Analysts expect earnings to reach $4.8 billion (and earnings per share of $0.76) by about August 2027, up from $1.5 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 18.5x on those 2027 earnings, down from 44.1x today. This future PE is greater than the current PE for the US Banks industry at 11.2x.
• Analysts expect the number of shares outstanding to grow by 0.98% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.73%, as per the Simply Wall St company report.

Risks

• There is a risk associated with the expansion into new product areas and market segments, notably in Brazil and Mexico, which could potentially lead to increased delinquencies and affect net margins due to higher provision expenses.
  
• The reliance on continued customer growth as a fundamental principle for accelerating earnings could be jeopardized by market saturation or increased competition, impacting revenue.
  
• Nu Holdings' operations in Mexico and Colombia are not yet profitable. The strategy of investing in these markets may not yield the expected return on investment in the foreseeable future, which could strain earnings.
  
• The aggressive growth strategy, including expanding down the credit spectrum, may lead to higher than expected non-performing loan levels (NPLs), impacting net income through increased credit loss provisions.
  
• Currency depreciation against the U.S. dollar poses a financial risk, as significant portions of revenue are generated in LatAm currencies. Currency volatility could lead to unpredictable revenue and profit margins.

Valuation

• The analysts have a consensus price target of $13.89 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 $17.0, and the most bearish reporting a price target of just $8.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $22.7 billion, earnings will come to $4.8 billion, and it would be trading on a PE ratio of 18.5x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of $14.09, the analyst's price target of $13.89 is 1.5% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.