1 reason why Nu Holdings is moving in the right direction

Like many tech and fintech stocks this year, the Berkshire Hathaway-Brazilian digital bank supported Nu Holdings (NAKED -6.70%) has seen its stock price struggle and has fallen more than 61% this year. Nu is a major disruptor in the Latin American banking space, first offering a credit card with no annual fee and then building a suite of banking products from there. Nu has amassed nearly 60 million customers, but in the past has received questions about its high valuation and path to sustainable profitability.

Yet, despite market volatility and bearish sentiment toward growth stocks, here’s one reason why I think Nu is headed in the right direction.

Image source: Getty Images.

Growth of ARPAC

Nu was able to acquire tens of millions of customers with a customer acquisition cost of $5, which is one of the lowest in the industry. The bank is incredibly popular in Brazil and is growing in Mexico and Colombia. These accomplishments should certainly not be ignored, but customers are generally only valuable to a business if they can be monetized. Because one of Nu’s propositions has been to offer products with far lower fees than incumbent banks in Latin America, it was naturally challenged to generate a high average revenue per active customer (ARPAC). But Nu has improved this metric in recent quarters.

Nu Holdings Customer Engagement Trends.

Image source: Nu Holdings.

If you look at the third chart on the far right, you can see that ARPAC at the end of the first quarter was $6.70. That’s up from $3.50 about a year ago, so the bank is increasing monthly ARPAC nicely. Now $6.70 is still low compared to incumbent retail banks in Brazil, which have monthly ARPACs of around $40, but if you look at some of Nu’s more mature cohorts, the monthly ARPAC has reached 19 $ in the first quarter, which is also up from the sequential quarter.

During the company’s earnings call, Nu chief financial officer Guilherme Lago attributed ARPAC’s growth largely to higher Nu bank account and credit card penetration. But he added that customer penetration of Nu’s other products, such as personal loans, is still quite low. In fact, Lago said customers who have used Nu’s three main products, which include bank account, credit card and a personal loan, have an ARPAC of around $35 to $40. Nu is also rolling out many other products, including insurance, investments, and a marketplace that will hopefully help ARPAC grow in the near future.

When ARPAC grows, the company obviously does well. In the first quarter of the year, Nu generated record revenue of $877 million, well above analysts’ estimates for the quarter.

on the right path

There’s more that will be important for investors to watch out for when it comes to Nu, other than ARPAC. Investors will also want to closely monitor asset quality among Nu’s loan portfolio and broader economic factors in Brazil as well. But ARPAC is a key performance indicator and is definitely moving in the right direction after the first quarter. If Nu can continue to develop ARPAC, he has a very good chance of succeeding.

With Nu now trading at less than $18 billion in market cap, investors have the option to buy at a lower valuation than Buffett and Berkshire. The road probably won’t be linear, but I think Nu is a good long-term buy at these levels.

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