The early days of a disruptor? Why I love Nu Holdings (NU)


I have already said here that early trading of newly IPO stocks, particularly in well-known companies, tends to follow a pattern: if the investment bankers who manage the offerings are successful, and they usually are, it there will be enough unmet demand for the stock to start trading above the offer price and climb within the first two days, giving those who bought stock in the IPO a chance to make a quick profit. Some of them inevitably take that chance and the stock retreats from its early highs. This usually takes a week or two, but in the case of NU Holdings (NU), it seems to have happened within the first three days of trading.

There’s a chance that there’s more to this pattern and NU will be available at a lower price in the future, but whether you wait or rush now, Nu Holdings’ long-term prospects make it a purchase worth considering. on any setback.

Nu Holdings is the parent company of Nubank, a Brazilian online banking company that is disrupting the financial sector in its own country and has expanded into Colombia and Mexico. So far, Brazil’s big traditional banks have had a stranglehold on their business and, as tends to happen when cartels or efficient monopolies dominate a market, consumers have suffered. Large and varied fees, limited product offerings and the fact that only 60% of Brazilian cities have bank branches has kept millions of people from being banked, creating an opportunity for a company like Nubank that they have seized with enthusiasm.

Their growth rate and potential are phenomenal. According to their IPO filing, Nubank essentially doubled its revenue this year compared to 2020, bringing it to $1.3 billion. What should be of interest to investors is that according to its own estimates, their potential market was $186 billion in 2020 and continues to grow rapidly. That’s a lot of room for growth, but can they take advantage of it?

Early indications are that they can. They have already started to revolutionize the banking industry in the region by empowering millions of customers without any aggressive marketing, or even a lot of marketing. They have grown largely through word of mouth and by achieving excellent customer satisfaction numbers. As a result, their customer acquisition costs (CAC) are low and, as you know if you’ve ever looked shark tankit’s one of the most important numbers, if not the most important, for online startups.

That doesn’t mean there aren’t potential problems for NU. Despite the weak CAC, Nubank is currently losing money financing its rapid growth. While this seems to be the norm these days for companies going public, I would normally like to see proof that they can be run profitably before investing. Here, however, there is such a clear path to profitability and such enormous potential for growth that there is no doubt that Nubank will be profitable before too long. Even if they choose to delay that and stay focused on growth, they’re adequately capitalized post-IPO and have a few early investors with deep pockets, including Warren Buffett’s Berkshire Hathaway, making cash flow less problematic.

Perhaps more worrying is the fact that 2022 is an election year in Brazil. It looks like a game between former president Luiz Inacio Lula da Silva and incumbent president Jair Bolsonaro with ‘Lula’ well ahead in the polls at the moment. This may worry some US investors as he represents the leftist Workers Party, but the disruptive nature of Nubank and their huge popularity with their customers make it likely that they will escape any regulation or massive policy that would hamper their growth. . They are the “people’s bank” in Brazil and oppose the establishment. Targeting them would be seen as siding with traditional banks, which have served the people so poorly for so long, and it would be political suicide for any candidate, regardless of their position on the political spectrum.

Nubank shares are still in their infancy and there will no doubt be some volatility ahead. However, the real disruptors that go public early in their growth cycle are hard to find, and that’s what NU is. This makes it a stock to build over time and hold for the long term and from this early pullback, that’s what I’ll do.

* Warning:Just in case you didn’t catch it from that last sentence, the author intends to buy the stock soon and in the future.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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