Nu Holdings Ltd (NYSE: NU) is a hypergrowth digital bank that’s taking advantage of the critical junction between financial inclusion and digital adoption in Latin America.

On May 14th, the company reported impressive Q1 2024 results. Revenue increased 64% year over year to $2.7 billion, and net income surged 160% to $379 million, driven by the company's efficient low-cost model. The company recently celebrated a significant milestone, surpassing 100 million customers across Brazil, Mexico, and Colombia.

With innovative offerings such as zero-fee credit cards and high-yield savings accounts, Nu Holdings is seeing strong customer engagement with an 83% monthly activity rate. This means that the digital bank gets to offer (and profit from) the best of both worlds:

• User-friendly digital-only banking services.

• Resonance with the modern consumers’ preference for convenience.

• Drastically lower cost base with no physical branches.

Let’s dive in.

Riding the Fintech Wave

The surge toward digital banking in Emerging Markets offers substantial growth potential for Nu Holdings. With mobile subscriber rates projected to hit 77% by 2030 and smartphone adoption expected to reach 88% by 2025 in countries like Brazil, Nu Holdings is poised to capitalize on rising internet and smartphone usage in the region.

Additionally, supportive regulations across Latin America bolster Nu Holdings' expansion. Brazil, Mexico, Chile, and Colombia have enacted laws fostering fintech growth while ensuring consumer protection.

One notable example is Brazil's Pix payment system, backed by the Central Bank. Its 43% daily usage among consumers highlights regulatory success in promoting fintech. These regulations create a fertile environment for Nubank's business and prospects.

Expansion is Just Beginning

Let's shift our focus to Nu Holdings' operations. The digital bank has added over 20 million customers year-over-year and is monetizing these customers at an increasing rate. Average revenue per active customer (ARPAC) to $11.4 monthly in Q1 2024, with mature cohorts soaring to $27 monthly. Nu Holdings' efficient cost structure is complementing this growth, boasting a cost to serve of less than $1 per active customer monthly ($0.9 in Q1 2024).

The company's commitment to underwriting is evident through its 5.0% non performing loan ratios, which are much lower than traditional banks in Latin America.

In Brazil, Nu continues to dominate the market, with a customer base exceeding 92 million by the end of Q1'24. International expansion efforts in Mexico and Colombia are yielding promising results, with Nu rapidly gaining market share and establishing itself as a player in these regions. In other words, the expansion to Latin America, a $2 billion banking market, is just beginning.

Bolstering its financial position, the company boasts a strong liquidity stance, evidenced by a loan-to-deposit ratio of 40% and substantial excess capital. Nu Holdings' credit portfolio, comprising both secured and unsecured loans, has witnessed remarkable growth, with personal loans surging by 88% year-over-year.

Blowout Earnings

Nu Holdings' Q1 2024 results highlight continuing strong performance. Net income rose to $379 million, up from $142 million in Q1 2023, and an annualized return on equity (ROE) of 23%.

Revenue grew by 67% year-over-year to $2.7 billion, beating estimates by $170 million. Gross profit reached $1.2 billion, a 76% increase, with a 43% margin. Analysts project continued growth, with FY 2024 revenue expected to surpass $11.3 billion and EPS touching $0.36. Susquehanna (NASDAQ: SUSQ) and KeyCorp (NYSE: KEY) analysts took note, raising their price targets in the last few months. Susquehanna’s price target now sits at $14, implying a 20% upside for the stock.

In Short

While Nu Holdings shows impressive growth prospects, investors should acknowledge the emerging competition in the fintech space. Startups like Uala and international players like Wise and Revolut are entering and growing in Latin American markets.

However, Nu's robust customer base, breakneck growth, and asset-light business model position it as a strong contender in the financial sector. Considering both risk and reward, investing in Nu Holdings presents a compelling opportunity for those bullish on fintech and digital adoption.