Why I'm Bullish on Nu Holdings

Nu Holdings operates a digital bank in Brazil, Mexico, and Colombia. Although, it has only been in existence since 2013, NU has already become one of Latin America’s largest financial institutions, with over 90 million customers. In today’s article, I am going to explain why I am bullish on Nu.

 Cross-Selling Opportunities and New Products and Services

Nu is not just a bank. Rather, Nu offers a wide variety of financial products and services. Bank accounts, credit cards, investment platform, insurance, personal loans, and business accounts are all some of the products and services offered by Nu. Nu’s credit card and bank account are its biggest draws and are the backbone which should help Nu sell other products and services. Once customers start using Nu’s credit card and bank account on a regular basis, Nu can more easily and efficiently cross-sell to those customers.

Cross-selling is an extremely important part of my bullish thesis for Nu. Cross-selling is much more efficient than selling to new customers. With cross-selling, marketing costs are minimized, and Nu has the potential to utilize the data it already has on customers to tailor offers to them that meet their specific needs.

Nu is also focused on simplicity. Nu tries to offer financial services and products that are simpler and less bureaucratic than its competitors by not charging as many fees and by allowing for people to manage their accounts on Nu’s app. The simplicity of banking with Nu is a one of Nu’s biggest attractions for customers, and the theme of simplicity carries over to cross-selling. It can be simpler and more convenient for many people to manage all their financial services with one company rather than to have accounts with many different financial institutions. For this reason, customers who were already attracted to Nu for the simplicity and convenience of its credit card and bank account may also be attracted to the simplicity and convenience of utilizing Nu for other financial services. For example, instead of having to open a new account with a different financial institution, a Nu credit card and bank account customer may decide, for sake of convenience and simplicity, to utilize Nu’s investment platform.

Additionally, Nu will hopefully be able to continue to roll out new products and services. Nu has been aggressive in expanding its offering, and I expect this to continue, giving Nu opportunities for continued growth.

International Expansion

Nu currently only operates in three countries, its original home market, Brazil, and two countries it only entered in 2020, Mexico and Colombia. While Nu has a large customer base in Brazil, with 84 million customers in the third quarter of 2023, Nu is still growing in Brazil. Nu has much smaller bases of customers in Mexico, with only 4.3 million customers in 2023Q3, and Colombia, with 800,000 customers. Given that Mexico’s population in 2022 was over 127 million people and Colombia’s over 51 million, Nu still has an immense growth runway in its newer markets of Mexico and Colombia.

Furthermore, in time, I expect that Nu will continue to expand geographically and enter other countries in Latin America. Latin America’s population in 2022 was over 626 million people. If we subtract out its three current markets as well as Venezuela and Cuba, whose current political environment currently makes expansion in those two countries seem unlikely, the rest of Latin America has a population of over 192 million people. This gives Nu even more possibilities for growth by expanding to new markets.

Nu has the potential to capture a significant market share in these countries. In Brazil, as of 2023Q3, 51% of Brazil’s adult population were Nu customers. This is immense and shows that Nu’s service truly resonates with customers. The wide appeal of Nu in Brazil gives me confidence that Nu will be able to do well in other countries as well. While Nu may not replicate this same level of success in the rest of Latin America, I am hopeful that Nu will be able to gain significant market share in many different countries of Latin America over time.

Low-Cost Provider and Scale

As a purely digital bank, Nu benefits from lower overhead costs than legacy banks that have branches. Nu can pass on the savings to customers in the way of lower fees. This structural advantage makes it difficult for legacy banks to compete against Nu on pricing. Nu reported in its 2023Q3 earnings release that its average cost to serve per active customer was $0.9. In essence, Nu is able to beat the big legacy banks on being the low-cost provider.

Furthermore, compared to smaller FinTech startups which may try to compete with Nu, Nu has a scale advantage. Due to Nu’s already considerable scale, Nu can spread out fixed costs better than smaller startups. This should help Nu to have a cost advantage over smaller startups. Just as importantly, Nu has the resources to continue to invest in research and development, allowing it to stay at the forefront of innovation.

Nu is in an advantageous position of having structural advantages over legacy banks while having a scale advantage over smaller FinTech startups. Due to this, I believe Nu should be able to remain one of the lowest cost providers of financial products and services in Latin America, which provides an economic moat for the company.

Growth of the Middle Class

As Latin American countries continue to grow economically, there should be a growth in the size of the middle class. This presents a secular tailwind for Nu. In essence, as people become wealthier and have more disposable income, they typically look for ways to better manage that money. Nu should benefit from this trend. As more people enter the middle class, Nu’s total addressable market for products such as its investment platform and insurance will grow. While economic growth can be variable and I certainly do not expect a steady linear growth rate in the economy, over the long term, I believe Latin America’s economy and middle class will grow and this trend will help Nu.

Digital Payments

The future of payments is digital. Cash is on the way out. As this transition occurs, Nu stands to be a key beneficiary and actor that helps to enable this trend by offering both debit and credit cards. The increased desire of consumers to obtain and utilize credit cards and debit cards in order to make digital payments is another secular tailwind that should continue to help Nu to grow.

Impressive History of Growth and Good Leadership

As previously mentioned, Nu has grown rapidly. To be able to gain over 90 million customers within the first eleven years of a company’s founding is resounding growth for a financial institution. Furthermore, this indicates to me that Nu’s product and service offerings are fulfilling a desire of customers and that Nu’s executives are able to execute on their vision.

Nu is led by CEO and Chairman David Vélez, one of the founders of the company. Cristina Junqueira, another founder of Nu, serves as Chief Growth Officer and CEO of Nu in Brazil. Having two of the founders continue to be at the very top of the organization gives me confidence that the company will remain focused on its vision and culture of customer service and innovation that has led to such spectacular growth.

Conclusion

Nu has many of the attributes I look for in an investment: good leadership, an economic moat, a history of success, secular tailwinds, and a long runway for growth. Nu still has a lot of work to do to become the company I believe it can become, but the results up to this point in the company’s history have been wonderful.

Disclaimer: This article is for discussion and entertainment purposes only. Nothing contained in this article is financial advice, investment advice, tax advice, or any other kind of advice. Nothing contained in this article should be considered a recommendation to buy or sell any stock. Nothing contained in this article should be considered a recommendation to undertake any type of financial activity. The author is not a financial advisor. The views expressed are solely the opinion of the author, and the author’s opinion may change at any time. The author has no responsibility to update this article if his views change. The author does not guarantee the accuracy of the information contained in this article. Investing, including investing in stocks, involves risk. The potential to lose capital invested is a risk of investing in stocks. Past performance does not guarantee future results. Before making any investment decision, a person should do their own research, consider their individual circumstances, and strongly consider seeking the advice of a properly licensed professional. The author is not responsible for any decisions made by the reader. The author is not responsible for any actions of the reader. The author is not liable for any loss a reader may suffer from buying or selling stocks. The author is not liable for any loss a reader may suffer from any financial decision made by the reader. Once again, this article is NOT financial advice, investment advice, tax advice, or any other kind of advice. As of January 19, 2023, the author is invested in Nu Holdings Ltd (NYSE: NU). The author’s portfolio of stocks may change at any time, and the author does not have an obligation to inform readers if and when the author’s portfolio changes. Likewise, the author does not have an obligation to update this article if the author buys or sells any stock, including but not limited to stock of the companies mentioned in this article.