Nu Holdings (NYSE: NU) has been the focus of considerable investor enthusiasm, but is the stock trading at an unjustified premium? In this article, we will conduct a critical analysis of Nu Holdings and provide a price target based on our findings.
Earnings Expectations:
The Q2 earnings of Nu Holdings managed to beat expectations, but this doesn’t necessarily mean smooth sailing ahead. We anticipate that Q3 revenue and EPS could fall short of analysts’ estimates due to several potential challenges, including growth stagnation and market penetration hurdles. Rising delinquencies and high P/E and P/B ratios hint at the possibility of a decline in customer growth and an overvalued stock.
Customer Growth and Market Penetration:
Nu Holdings has achieved a significant customer base in Brazil, with approximately half of the adult population as customers. However, to maintain rapid customer growth, Nu needs to replicate this success in markets like Colombia and Mexico. Unfortunately, it hasn’t achieved the same level of penetration in these regions, with just 700 thousand customers in Colombia and around 4 million customers in Mexico after several years of operation.
Economic Challenges in Secondary Markets:
Nu faces stiff competition in these secondary markets. Mexican banks have reacted quickly to its success, and startups like Stori have reached millions of customers. This intense competition may lead to increased customer acquisition costs in Mexico and Colombia.
Revenue Projection:
Using a linear regression model, we estimate Nu’s Q3 revenues to be approximately $1.92 billion, which is lower than analysts’ expectations by 5%. While this projection assumes a linear relationship between customer growth and revenue, economic factors and changes in average revenue per customer could impact the results.
Operating Costs and Income Tax:
Nu has been reducing its operating costs as a percentage of revenue, and we estimate Q3 operating income to be approximately $299.3 million. Income tax is projected to be around $108.3 million. As a result, we estimate Q3 net income to be around $190.9 million, with an EPS of $0.04, falling short of analysts’ estimates by 35.5%.
Rising Delinquencies and Economic Impact:
Nu’s rising delinquencies, especially among lower-income cohorts, could pose a challenge, particularly with economic uncertainties in Brazil and Mexico. Consumer demand could weaken, affecting Nu’s ARPAC growth.
Valuation and Price Target:
Our analysis suggests that Nu Holdings is trading at a substantial premium compared to other Brazilian banks. Its high P/E and P/B ratios are particularly concerning. Based on our evaluation, we have a price target of $3.58 for Nu Holdings, which we believe is a fair valuation, considering its growth potential.
Upside Risks:
Despite our bearish outlook, there are upside risks. Nu could benefit from an economic upturn in Brazil and faster customer acquisition in Mexico and Colombia. Additionally, obtaining a banking license in Mexico could lead to increased customer growth.
Conclusion:
Nu Holdings has indeed shown impressive growth, but the stock appears to be trading at an unjustified premium. Investors’ high expectations for Q3 earnings may not align with the challenges the company faces. Our price target of $3.58 reflects a more conservative valuation that takes into account Nu’s growth potential while also considering the risks involved.