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Here's Why Nu Holdings Fell 60% in the First Half of 2022

What happened

Shares of the Brazilian digital bank Nu Holdings (NYSE: NU) tumbled roughly 60% in the first six months of 2022, according to data frerom S&P Global Market Intelligence.

The consumer-facing bank took a hit as interest rates across most of the world increased and investors grew increasingly concerned about the economy.

So what

Nu Holdings, which is backed by Berkshire Hathaway, went public at the end of December at a tough time for fintech stocks. Investors were starting to realize that inflation might be alarmingly high and that the Federal Reserve may not have a handle on it as suggested at the time.

Furthermore, the company went public at a massive valuation of $41.5 billion. I didn't like the valuation at that point because the company was not yet profitable and still in high-growth mode. Most stocks with those kinds of valuations have taken a beating this year, as rising interest rates have hammered growth stocks.

With rising interest rates, investors are worried about higher loan losses, which could affect Nu's customers, many of which have taken credit cards and personal loans out with the bank. Millions of Nu's customers are also new to the banking system, making their credit quality harder to predict.

Now what

Despite concerns about what's in store for the economy and rising interest rates, I do see massive potential in Nu.

The company has completely disrupted the Brazilian and Latin American banking scene, which can be categorized by high fees and difficult for many to access. Nu now has close to 60 million customers.

Nu is also showing good progress in growing monthly average revenue per active customer (ARPAC), which it will need to continue to do if the bank is going to succeed. In the first quarter of 2022, Nu reported that ARPAC across the bank reached $6.70, which is up from $3.50 from one year earlier. But more mature customer cohorts had made Nu their primary bank and had ARPACs of $19, which also grew nicely from the fourth quarter of 2021.

Nu also smashed quarterly revenue estimates for the first quarter, generating record revenue of $877 million.

With the stock now down below a $20 billion market cap, investors now have the rare opportunity to invest at a lower valuation than Berkshire did. It's still early for Nu and the bank will need to keep growing ARPAC, but I see great potential for the stock and would recommend buying.

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Bram Berkowitz has positions in Nu Holdings. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.


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