Nu Sports an Attractive Valuation as Fears About Brazil’s Economy Look Overdone

By Larry Ramer

Amid worries about Brazil’s economy in general and its inflation rate in particular, the NYSE-traded shares of the country’s fintech and lending giant, Nu Holdings (NU), have tumbled 25% in the last three months. 

But with the country’s economy still expected to grow significantly this year and its inflation rate, at 4.83% in December, trending only slightly above the central bank’s tolerance level, a recession does not appear to be in the cards. 

Also importantly, given Nu’s very low valuation relative to its tremendous growth, NU stock more than bakes-in a major deterioration of its financial results. And finally, Warren Buffett has given the name his seal of approval. 

In light of these points, I urge growth investors looking for an emerging-market play to consider buying NU stock.

What’s Up With Brazil’s Economy?

Since the South American country generates over 50% of Nu’s revenue and more than 100% of its profits, Brazil’s economic health is certainly critical for Nu and NU stock.

And the country is definitely experiencing its share of economic problems, as its inflation rate for the 12 months that ended in December came in at 4.83%, down from November’s 4.87%. In response, Brazil’s central bank has decided to increase its benchmark interest rate by two percentage points, bringing it to a very high 14.25%, by March.  

Still, on the positive side, inflation is only trending slightly above the central bank’s “tolerance range” of 4.5%,  and it is expected to slow starting in the third quarter.

Additionally, research firm Capital Economics believes that Brazil probably will not endure a “hard landing” and it predicts that the country’s economy will expand at a fairly robust rate of 2.3% in 2025.

Given these positive aspects of Brazil’s economic outlook, I don’t expect the country to enter a recession that would cause Nu’s financial results to nosedive. 

Tremendous Growth, Low Valuation

In Q3, Nu’s revenue jumped to $2.94 billion from $2.14 billion in the same period a year earlier. Moreover, its earnings per share came in at 11.3 cents, nearly double the EPS of 6.2 cents that it generated in Q3 of 2023. Management is slated to report Q4 earnings after-market on Feb. 20. The consensus forecast is for earnings to come in at 12 cents per share, per FactSet.

Turning to user growth, Nu added 20.7 million new customers during the 12-months ending September. That brought its total user base to 109.7 million. Also impressively and boding well for its ability to succeed in its less-mature Mexican market, a whopping 56% of the adult population of Brazil now uses Nu, and 84% of its overall customer base uses its services at least once per month. 

Despite the company’s tremendous growth, the shares change hands at a forward price-to-earnings ratio of just 26.9 times. Unsurprisingly, the stock’s trailing PEG ratio, which compares Nu’s price-earnings ratio to its growth, is extremely low, coming in at 0.08x. That’s well below the financial sector’s median trailing PEG ratio of 0.08x.

About Those Buffett Holdings

Buffett’s Berkshire Hathaway (BRK.B) owned 86.4 million shares of the fintech company’s shares as of the end of Q3. Although Berkshire unloaded around 19% of its holdings in the name during the latter quarter, the fact that it owns a significant amount of this fairly little-known Brazilian company’s stock suggests that the company’s future is quite bright. And Berkshire reduced the size of its stakes in several other companies in Q3, including Apple (AAPL) stock. 

This suggests that its decision to trim its stake in Nu was more of a call on the global economy than anything else. 

Meanwhile, more than 125 exchange-traded funds hold NU stock, with the biggest holder being iShares Russell Mid-Cap Growth ETF (IWP).

A Bright Future for NU

With its tremendous success in Brazil, Nu has shown that its products and marketing abilities are quite strong. That bodes well for its ability to succeed in the longer term in its newer markets of Mexico and Colombia. Further, the stock’s valuation more than bakes in any medium-term issues that Brazil’s economy is likely to face. 

Disclaimer: At the time of writing, the author did not own any of the stocks mentioned in this article. The information provided in this article is for educational and informational purposes only and should not be construed as investment advice. Always conduct your own research or consult with a licensed financial professional before making any investment decisions. Past performance is not indicative of future results.

Larry Ramer is currently ranked 382 out of 30,536 financial bloggers analyzed by TipRanks, with a 13.2% return on his buy and sell ratings. He has been a long-time contributor to InvestorPlace, Seeking Alpha and Fintel.io. He is one of the founding contributors to this newsletter.

He focuses on contrary investing and specializes in the renewable energy and consumer discretionary sectors. Among his highly successful, contrarian picks have been Plug Power, Exxon Mobil, solar stocks, and airline stocks. On the downside, he was an early predictor of the collapse of cryptocurrencies, marijuana stocks, Ocugen, and Meta Platforms.