Nu Holdings (NYSE: NU) investors ended this past trading week on a downtick. The fast-growing Brazilian fintech stock plummeted 19% on Friday after the company posted a disappointing financial update.
There were a few pressure points in Nu's fourth-quarter results. However, an interesting growth investing icon was buying in Friday's deluge as many investors were selling: Ark Invest co-founder and CEO Cathie Wood. Nu was the only stock purchased for her ARK Fintech Innovation ETF(NYSEMKT: ARKF) on Friday, and it was one of only two stocks that Ark bought across all of its exchange-traded funds on Friday. It added to existing positions in both cases.
Should you join Wood in buying the parent company of Nubank following last week's deluge? Let's take a closer look at the Ark purchase, what tripped Nu up, and whether the fresh results are an alarm or a dinner bell.
Ark tries something Nu
Ark's addition to its position in the Latin American branchless bank operator is noteworthy. The last time her Ark fund that specializes in fintech stocks bought Nu was last March 14, more than 11 months ago. Making things even more interesting, she has sporadically sold small chunks of her position since her mid-March nibble. Is Wood now becoming a bigger believer in Nu, or is Ark just responding to Friday's sell-off as a buying opportunity?
Also noteworthy is that despite the 19% tumble, Nu is still trading marginally higher, with a 4% gain so far this young year. The stock is rising for the third consecutive year. It more than doubled in 2023 before following that up with a 24% market-matching rise last year. Now Ark is finally a buyer after a large single-day slide, but the long-term tendency for Nu has been to move higher.
Image source: Getty Images.
Nu problems
It wasn't a perfect earnings season for a company that has earned its upticks in recent years by spoiling investors with a "beat and raise" cadence before proving mortal last week. The numbers look appetizing on the surface. Revenue rose 50% on a foreign-exchange neutral basis to $3 billion, fueled in part by a 22% jump in customer growth. But the top-line gain seems more modest when you translate the ascent for stateside investors. Many Latin American companies find that local revenue moves are pared back by the rising dollar, and in this case, revenue growth in U.S. dollars improved by just 24%. Analysts were holding out for a 32% increase, and that was a deceleration from the prior quarter's 38% rise.
Adjusted net income, on the other hand, soared 54% in U.S. dollars, just ahead of expectations. This is the first time in more than a year that there hasn't been a double-digit percentage beat on the bottom line, but this performance is obviously still a good thing.
Other metrics, however, are more problematic. Monthly average revenue per customer clocked in at $10.70. That's just ahead of the $10.60 in the prior year's fourth quarter, but it also marks the third sequential quarterly decrease. The latest figure more than works for a very profitable company that spends an operating cost average of just $0.80, but the trend here will bear watching.
Net interest income has also now declined sequentially in back-to-back quarters, and is lower than where it landed a year earlier. Finally, Nubank's monthly activity rate -- the number of customers with transaction activity in the past 30 days as a percentage of total open accounts -- experienced a rare sequential dip in the fourth quarter.
Zoom out, though, and Nu starts looking a lot better. A 24% increase in U.S. dollar-based revenue may seem initially disappointing, but size up the competition: Two of this country's most prolific fintech stocks -- PayPal Holdings(NASDAQ: PYPL) and Block(NYSE: XYZ) -- barely achieved 4% revenue growth in the same quarter. All three stocks are currently trading for 12 to 14 times forward earnings. Why wouldn't you side with an international option growing a lot faster than the other two options?
Nu isn't a household name, but 58% of Brazil's adult population now has a Nubank account. It's growing faster in Mexico and Colombia, its two other markets that are much smaller and earlier in their growth cycle. There are plenty of pressure points that investors will want to keep an eye in the next few quarters, but right now Nu appears to be too cheap and dominating to ignore in a region whose high ceiling mitigates the inherent risks.
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Rick Munarriz has positions in Nu Holdings. The Motley Fool has positions in and recommends Block and PayPal. The Motley Fool recommends Nu Holdings and recommends the following options: long January 2027 $42.50 calls on PayPal and short March 2025 $85 calls on PayPal. The Motley Fool has a disclosure policy.
