Nu Holdings

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Nu Holdings is a leading digital banking platform in Latin America, operating in Brazil, Mexico, and Colombia, with a mission to empower individuals and SMEs with financial services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Nu Holdings (also known as Nubank) operates as a digital financial services platform primarily in Latin America, offering a range of products, including credit cards, digital bank accounts, personal loans, and insurance. The company has rapidly grown its customer base, primarily through its focus on low fees, easy-to-use digital interfaces, and excellent customer service.

Revenues by geography: Brazil dominates Nu’s revenue stream with over 85% of total revenues. Mexico follows in distant second, while Colombia is still in the process of generating a significant level of income. Revenues by Products: The main source of revenues are generated by interest earning credit and lending products. This followed by interchange fees for the credit cards and fees generated from other products.

Industry Trends: The financial services industry in Latin America is undergoing a rapid transformation driven by factors like increasing mobile and internet adoption and a largely underbanked population. There’s a massive growth potential in providing digital financial services to a population that has previously had limited options.

Digitalization: There is a clear trend towards digitalization and customers switching to online banks and financial products.
Increasing Competition: Traditional banks, smaller neobanks and other financial institutions are all trying to capitalize on the growing market and this lead to a very competitive situation.
Regulatory Landscape: Regulations in Latin America are continuously evolving as regulators try to keep up with the growing digital banking sector and new technologies.

Margins: The company has shown improving margins, although its ability to sustain them will be important in highly competitive environment. The cost to serve for active customer remained relatively stable, indicating that the company is growing profitably.

Competitive Landscape: The competitive landscape in the Latin American financial services industry is very dynamic. Nu competes against well-established traditional banks, but also other fast-growing fintech companies. Although there are no easy moats and no barriers of entry, Nu is working with unique approaches that allows the company to establish and defend a market. These companies have a clear advantage regarding their technology and scale that makes difficult for others to imitate their business.

Traditional Banks: While traditional banks have stronger reputations and deeper pockets, they are struggling to provide the digital experience that more tech-savvy customers are seeking. The main advantage of these banks is their already established branch networks, but for modern customers this isn’t a big advantage. They are struggling to adapt to the new digital world.
Other Fintechs/ Neobanks: The emerging fintech/ neobank sector is characterized with low barriers to entry. Some neobanks try to differentiate by being cheaper, or by focusing on a particular niche area. The fintech sector offers more dynamic environment for the company to compete in.
Global players: Many large global players, such as PayPal, are also expanding in Latin America. These provide an additional threat to the company as they have a lot of experience and huge budgets that smaller competitors cannot match.
Local Players: There are also various local players with experience in their respective markets.

What Makes Nu Different? Nu is differentiated by the technology driven culture and product development process. Its goal is to offer better banking solutions than current options in the market and are using technology as its main weapon.

They provide a streamlined and convenient user experience with their app.
They target those that are underbanked and give them access to modern banking products and services with a low fee.
They focus on developing innovative products that will disrupt traditional banking.
They are focused on providing high quality customer service.

Financials Deep Dive

Income Statement

Revenue: The company has shown an impressive YoY revenue growth, with the latest reports showcasing an increase in interest income, fee income and other revenue streams. This is driven by both customer acquisition and expansion of products and services offered to their customer base.
Cost of Financial and Transactional Services: A significant part of Nu’s cost structure includes provisions for credit card allowances and interest expenses, and also the interchange costs for processing credit card transactions, including third-party network costs.
Operating Expenses: Customer support and operations expenses make up a substantial chunk of operating expenses, reflecting Nu’s focus on providing good customer service to their customers.
Net Income/Loss: Even though revenue growth has been great, Nu has historically generated losses. The company was able to reach profitability in mid-2023.

Balance Sheet

Cash and Cash Equivalents: Nu Holdings maintains a sizable amount of cash and cash equivalents, which are used as liquidity to meet its day to day requirements as well as provide security against potential risks. A part of the cash flow is also generated by the high liquidity securities the company has on its balance sheet.
Securities: Nu has a portfolio of low risk investments such as government bonds, corporate bonds, and other fixed income instruments, which have a maturity that usually does not extend past 12 months. A notable portion of those are from Brazilians banks and are designed to meet the country regulations.
Credit Card Receivables & Loans to Customers: The largest part of the assets are credit card receivables and loans. The growth of these is correlated to the growth of the company. This means the company is successfully growing its credit business.
Debt: Nu does not have that much debt. As with many fintech companies they mostly rely on the equity that they have to operate.

Cash Flow

A good level of cash is generated from core operations, demonstrating the ability of Nu to convert its earnings into cash.
A significant amount of investment is seen in credit and loan receivables, showing the focus on the lending business.
The company is heavily reliant on equity financing from new investors to cover its cash requirements.

Recent Concerns and Management’s Views:

Credit Quality: The company recognizes that the credit portfolio has expanded a lot and that it has more customers who are in lower-income segments, this leads to a great focus on maintaining a solid portfolio and increasing profitability.
Growth Rate: Even though there are no problems with growth, there is a decline in new customers compared to previous years. The company is focused on optimizing growth and trying to get more value from existing customers.
Operating Leverage: There are continued efforts to have better operating leverage by reducing cost and generating better returns for each customer.
Risk: The company has a strong focus on risk management and continuously improves its processes and algorithms to minimize risk.

Moat Assessment

Based on the analysis, Nu Holdings has a narrow moat with a rating of 3 out of 5.

Brand Recognition: Nu is becoming a recognizable brand in Latin America, especially among the younger, digitally native populations. A trusted brand gives the company a slight advantage when customers need to pick a banking solution. The company spends a lot of time and money to build that brand.
Network Effects: The business model for the company is based on attracting more and more users to use their digital banking platform, with new users also benefiting from greater functionality in their banking apps. This generates a type of network effect. This effect is mostly seen on the credit card business and partially for the bank accounts.
Switching Costs: Nu has a great customer experience that is made for using its products and services, and this makes it difficult for customers to switch to another provider. It’s not easy to switch from credit cards and their rewards programs, the amount of banking data they have etc. While switching costs are lower in the low-income segment of the market, in general the switching costs are great in the company’s target market.
Cost Advantages: While Nu can’t compete in the scale of traditional banks, its digital only structure allows it to operate with very low costs compared to the legacy banking system. Because of this, the company can compete by having the lowest interest rates and more attractive services for its customers.
Lack of barriers of entry: Even with the above-mentioned strong points, there are low barriers to entry in the fintech sector. This means a new competitor can easily come to the market and start offering the same products and services. However, it takes years to build the kind of market and tech ecosystem that Nu is having.

Risks to the Moat and Business Resilience

Several risks are related with the Nu Holdings:

Regulatory Risks: The rapidly evolving regulatory environment is a challenge that could limit some of the company operations and might force them to lower their profits. Changes in data privacy or capital requirements are risks they have to be ready for. The company must continuously adapt to new rules and regulations to stay ahead of the regulatory environment.
Intense Competition: In the fast growing market, many competitors are vying for market share and this may result in lower pricing and more customer acquisition costs, which will lower the overall earnings.
Technological Disruption: Fintech companies live or die by technology, if a new player or new technology arrives to the market that can offer more efficient services with less cost, it may become a massive challenge for the company to compete. The company must always stay up to date with the latest technologies and to apply the cutting-edge technologies to make their products better.
Macroeconomic Risks: All the countries Nu is operating at have their own challenges related to inflation, unemployment, and instability. This makes it difficult to forecast the future performance of the company.
Credit Risk: The rapid growth of the loan portfolio may imply higher risks related to credit default. This is especially concerning when the company is moving towards the lower-income population, where default rates tend to be higher than average. This needs constant attention and a good risk management practice.

Despite these risks, Nu Holdings has several key competitive advantages as mentioned above. It also has an experienced management that is highly committed to providing the best services to customers. This makes it a company that is prepared for the volatility and risk associated with the financial sector.

Understandability

I rate Nu as a 2/5 in understandability. Even though the core products and services of the company are easy to understand, it gets quite complicated to grasp the whole business model. The complex nature of the financial industry, coupled with technology makes it rather difficult for average individual to understand how Nu operates.

Balance Sheet Health

I rate Nu’s balance sheet health a 4/5. Even though the company has historically generated losses, it has been very aggressive in growing its user base and its product line, while at the same time kept its leverage low.

The company has good level of liquidity and plenty of cash.
They are growing well in both revenue and customer base.
They have a lot of capital to withstand downturns and uncertainty.
They haven’t had any problems with borrowing or getting funding.
They do have some credit risk with their lending portfolio, that requires careful monitoring.

The company also recognizes a number of different risks they face, and have the proper management and controls in place to properly manage these risks.