Could Buying Nu Holdings Stock Today Set You Up for Life?

A life-changing investment typically doesn't happen overnight, but rather after years of continued excellence. It takes an exceptional company with a long runway for growth. Nu Holdings (NYSE: NU) could be one of those stocks. The company provides banking and lending services to consumers and businesses throughout Brazil, Mexico, and Colombia.

These countries are emerging markets with growing economies. Many people there still use cash to pay for most things and lack access to modern credit cards, loans, investing services, and even checking and savings accounts. It's a compelling investment narrative, but do the numbers back it up?

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A two-cylinder engine driving superb top-line growth

Nu Holdings is posting eye-popping growth. The company's trailing-12-month revenue was about $1.2 billion in 2022 and has exploded to over $7.8 billion as of Q3 2024. Understanding the two factors driving this growth is key to determining whether it will continue.

The company has grown due to simultaneous customer growth and rising engagement. In other words, more people are banking with Nu Holdings and using its products and services more frequently. Over the past four years, Nu's customer count has quadrupled to 110 million. At the same time, its average revenue per active customer has increased from $3.50 at the start of 2021 to $11 as of Q3 2024. This is the result:

NU Normalized Diluted EPS (TTM) data by YCharts

The key question for investors is whether it can continue. Growth may slow as the numbers get bigger, but Nu has a long runway that should lead to years of strong growth. Nu Holdings currently services 110 million users across three countries with a combined population of approximately 395 million. The company estimates it serves 56% of the adults in Brazil, its oldest market. While the company grew its user base by 20.7 million people since Q3 2023,

Nu Holdings will likely need to expand into new markets to sustain its brisk long-term user growth. Fortunately, Latin America has a total population of 666 million, so it can expand significantly by entering new countries. There has even been discussion that Nu could expand into entirely new regions, including the United Kingdom and the United States.

Engagement (activity and product cross-selling) will also contribute to long-term growth. While most people in emerging markets still depend heavily on cash, their shift to payment cards and modern lending products could be a gradual tailwind for Nu holdings as discretionary income rises in these developing economies. In Q3 2024, the company's year-over-year deposits increased 48%, while its credit card and loan portfolio grew 36%.

Explosive earnings growth with an attractive price tag

Let's be clear: Nu is still a growth stock. The company's revenue grew 38% year over year in Q3 2024. Now, earnings are poised to follow suit. Nu turned profitable on a generally accepted accounting principles (GAAP) trailing-12-month basis in 2023, so earnings should grow quickly as the business expands faster than its expenses (operating leverage). Analysts estimate the company will grow earnings by an average of 48% annually over the next three to five years.

Meanwhile, the stock trades at a price-to-earnings ratio of just under 33. That is a surprisingly cheap valuation for such a fast-growing business -- a PEG ratio of only 0.7. I often buy high-quality companies at PEG ratios up to 2 to 2.5 (the lower the ratio, the better the value). Sure, the company may need to prove itself a bit longer to earn that reputation as a blue chip stock, but it's clear Nu's growth more than justifies its current price.

Can buying Nu Holdings set you up for life?

Growth stocks usually carry more risk because they don't have that long track record of excellence. However, I would argue that Nu Holdings is well on its way. It has become dominant in Brazil (56% market share), with remarkable user and engagement growth companywide. Now, the financials are following that path, too.

Banks like Nu Holdings are typically susceptible to recessions or adverse economic conditions that affect lending and banking services. However, there is so much growth that Nu Holdings seems likely to thrive, even if the economic conditions in Latin America fluctuate. A weak Latin American economy may slow growth, but it's unlikely to stop a promising long-term trajectory.

Even if Nu's earnings grow by 20% annually, far less than current estimates, the stock is poised for tremendous investment returns because its valuation is so low relative to its growth outlook. If the business can string together enough years of high-level performance, Nu Holdings could be a life-changing investment opportunity.

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.