Warren Buffett has been a net seller of stocks over the past eight quarters, building Berkshire Hathaway's cash reserves to its highest-ever level. He's completely exited some positions, like Floor & Decor, and trimmed down positions in others, like Apple. Apple still accounts for the largest position in the equity portfolio, and Buffett recently said that he would never sell it completely. Selling some of its stock doesn't look like a loss of confidence in the company.
Is it the same situation with Nu Holdings(NYSE: NU)? Berkshire sold about 19% of his stake in Nu in the third quarter. That's a small percentage of an already small position. Nu stock accounts for only 0.3% of the Berkshire Hathaway equity portfolio. This sale implies that Buffett and his lieutenants still thinks Nu is adding value to the total, and investors can make guesses as to why Buffett sold this small amount, but they're only guesses.
You can point more toward the amount of Nu stock Buffett is keeping as an indication of his sentiment toward Nu stock. The average individual investor, who has different goals than Buffett and his holding company, may want to scoop up shares of Nu stock right now.
Why Nu?
Nu is an all-digital bank based in Brazil. Brazil was ripe for disruption when Nu started out a little more than 10 years ago. It has an entrenched, highly regulated banking system with about six large banks and many barriers to entry, keeping many potential customers on the sidelines and creating challenges even for the affluent people who can access it.
Nu's creators set out to shake that up, offering easy-to-use, low-fee products for the masses. It's easy to see how that's been catching on. Not only has it drawn the mass consumer it was originally intended for, it's also attracting the higher-income population that's looking for a better experience.
Just several years in, Nu already has more than half of the adult population in Brazil as customers, and it has been adding more than a million new customers every month. On top of new members, it's generating increased engagement, with an 84% engagement rate -- that means 84 out of 100 members are engaging with the platform on a monthly basis. On top of that, Nu has launched in Mexico and Colombia, where it's growing at an even faster pace. It has plenty of room to run in all of its current markets, through member signups and cross-selling opportunities.
It's also become so profitable that even though only the Brazil business is reporting net income, it's been able to use those earnings to support growth in its newer regions while still demonstrating incredible profitability. Revenue increased 56% year over year in the 2024 third quarter, and net income rose 83%.
Why now?
Nu stock ended 2024 up 24%, even though it was up more than 80% as of October. There were a few things that happened around the same time that sent it down in the last few weeks of the year.
One was Buffett's sale. Although it was a small percentage, it spooked the market. At the same time, investors were concerned with how the volatility in the Brazilian economy is affecting Nu's financials and performance. One issue is inflation, which is still high in Brazil.
Another is that Nu works predominantly in Brazilian Reals, but reports in U.S. dollars. The drop in the value of the Real affects Nu's reporting. For example, one of its baseline metrics is average revenue per active user (ARPAC), which fell from $11.20 in the second quarter to $11 in the third quarter, but increased 2% currency neutral.
Finally, management made a recent announcement that it would invest in a digital bank that operates in South Africa and the Phillippines. After the already sour market sentiment, that didn't go down too well.
Investing in a company that operates within a volatile economy comes with challenges and isn't the right investment for the highly risk-averse investor. However, Nu's exposure to ongoing macroeconomic pressure looks short-term and low-impact. In other words, any bank is going to be affected by economic changes in its operating region. Nu is managing effectively, building a robust credit business that rounds out its full financial services platform.
At the current, lower price, it also looks like a bargain. If you have some appetite for risk and a long time horizon and you've been on the fence about investing in Nu stock, it looks like a great time to buy. If you already own shares, I would focus on Buffett's maintaining the majority of his position in Nu stock and follow.
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Jennifer Saibil has positions in Apple and Nu Holdings. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.
