NU Stock: Does a Buffett Sell-off Spell Trouble for Nu Bank?

Introduction

Nu Holdings [NU] is a São Paulo-based fintech and the primary bank provider for Brazilians. The company also has operations in Colombia and Mexico. With more than 100 million customers, it is the biggest digital bank outside of Asia. 

The stock spotlight will look at Nu’s ambitious expansion plans and how they are helping it to hit new heights, despite Warren Buffett selling off a large share of his NU holding. It will also look at the company’s recent financial performance and highlight any tailwinds and headwinds that may affect NU stock in the near term. 

Nu to UK? 

On November 25, Nu announced that it had received approval to consolidate its Colombian operations into one entity. The move reinforces its “long-term vision and commitment to Colombia and will allow the expansion of its portfolio of products and services in the future,” according to a statement. 

Nu is also considering moving its legal base to the UK following discussions with the UK government at the G20 Summit in Rio de Janeiro between November 18 and 19, Bloomberg reported.

If it goes ahead, the move could be the first step to the company eventually trying to crack the UK and European market. It is also seen as part of a push to encourage more tech firms to set up camp in the UK. 

“Nubank continuously reviews its corporate legal structure to align with the footprint of its operations,” a Nu spokesperson told Bloomberg, adding that “no decision has been made regarding the redomiciliation”.

Buffett Reduces Position 

NU stock is down 7.17% in the past month through November 26, but has gained 67.35% in the year to date. Its most recent close of $13.94 is 15.85% below its all-time high of $16.15, set on November 12. 

The Nu share price has pulled back following mixed Q3 results and Berkshire Hathaway [BRK-B] disclosing in its latest 13F filing that it has slashed its Nu stake by 19%. Having bought approximately 107 million shares around Nu’s IPO in December 2021, Q3’s sale is the first time Warren Buffett has reduced his position. 

Nu’s Margins Come Under Pressure 

Nu beat expectations for Q3. Revenue rose 56% year-over-year to $2.94bn, in line with what analysts polled by Bloomberg had been expecting, while net income more than doubled to $553.4m, beating the $495m analyst consensus.

The digital challenger bank added 5.2 million customers in the three months to the end of September, taking its total customer base to 109.7 million. Deposits were $28.3bn, a 60% jump from the year-ago quarter. 

However, its net interest margin fell both year-over-year and sequentially to 18.4%. Its risk-adjusted net interest margin rose compared to Q3 2023 to 10.1%, but was down from the previous quarter. 

The risk-adjusted net interest margin had come under pressure during the quarter due to higher yields as Nubank ramped up deposits in Colombia and Mexico and lending yields declined as the loan mix shifted towards secured lending. 

Nu CFO Guilherme Lago said on the earnings call that he expects the risk-adjusted net interest margin to expand again as deposit yields are lowered.

Two of Nu’s competitors within Latin America banking are Banco Santander [SAN] and BNP Paribas [BNPQY]. Here’s how their fundamentals compare. 

Source: Yahoo Finance

All three companies have a similar valuation. While NU stock has a P/S ratio that is roughly eight times that of BNPQY and SAN stock, Nu’s revenue growth is widely tipped to accelerate at a much faster pace given the continued demand for digital banking in Latin America.

NU Stock: The Investment Case 

The Bull Case for Nu 

Following the Q3 earnings, Susquehanna analyst James Friedman reiterated a ‘positive’ rating for NU stock and raised his price target from $16 to $18, implying an upside of 29.12% from the November 26 closing price.

In a note to clients seen by Investing.com, Friedman explained that the target was adjusted to reflect how the strategic expansion into Colombia and Mexico should help it to capture a bigger share of the total addressable market. ­

NU stock also got a price boost from Goldman Sachs, with the target raised from $17 to $19. 

The Bear Case for Nu 

While analysts are bullish in general on NU stock, there is the possibility that the share price could retreat after entering all-time high territory. 

“After the strong rally in Nu’s shares, we do not see [the Q3 results] as a trigger to another round of stock appreciation,” XP equity research analyst Bernardo Guttmann said in a note seen by BNN Bloomberg. The firm reiterated its ‘neutral’ rating. 

There is also the risk that Nu’s leadership in digital banking in Latin America could come under threat from both legacy players and new fintechs. On November 19, Santander launched Openbank in Mexico, a savings account offering customers a 12.5% interest rate. In comparison, Nu offers a rate of 14.75%.

Conclusion 

Nu is Latin America’s hottest bank right now and its customer base across the region continues to grow. Analysts are confident that the fintech’s growth story can continue, but NU stock’s hot streak could cool before rising again. The company could also come under pressure in the future from traditional banks entering the digital banking space.

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