This dynamic stock combines modern digital banking with an emerging market with seismic growth potential.
Emerging markets might be the best place to find lucrative investment ideas in today’s banking industry. Consider that Latin America has a population of 665 million, roughly double that of the United States. However, unlike in the U.S., large segments of the population still lack basic modern-day privileges, like essential banking services.
As the Latin American economy matures, Nu Holdings (NU -0.42%) figures to win big, making it arguably the best bank stock in which you can invest $500 today.
I’ll outline the case for Nu Holdings below, including its wide-open growth opportunities, exploding profit growth, and tantalizing valuation, which make it a compelling stock idea.
One of the world’s fastest-growing banks
Nu Holdings is a digital bank in Latin America. It offers its customers a range of financial products and services, including bank accounts, debit and credit cards, loans, investing, and more.
Many traditional banks in developed countries were built on a network of brick-and-mortar branches. The internet has helped digital banks expand faster because customers can access them through a website or smartphone app. That’s helped Nu grow its user base rapidly in recent years.
Despite only serving customers in Brazil, Mexico, and Colombia, the company’s user base has increased from approximately 26 million in 2020 to over 110 million today. Nu’s ongoing customer acquisition is going swell. The company’s third-quarter customer count was 20.7 million higher than a year ago. It’s now the leading bank in Brazil, serving 56% of the adult population. Nu’s existing markets account for approximately 395 million of the region’s 665 million people, so there’s still plenty of room for Nu to expand into new countries.
As Latin American consumers grow their incomes, they will likely spend, borrow, bank, and invest more. Simultaneous customer expansion and increased banking engagement have fueled stellar revenue growth. Nu’s Q3 revenue was $2.9 billion, a 56% increase year over year.
The bottom line is booming
As companies mature, their spending needs flatten out. Continued revenue growth eventually causes the company to turn profitable, and that’s precisely what’s playing out with Nu Holdings. The company’s strong growth is trickling down to the bottom line, driving fast GAAP and non-GAAP net income growth.
Nu’s Q3 earnings increased by a whopping 89% year over year. Analysts estimate that Nu will earn $0.41 per share for the entire year, a 71% increase over the $0.24 it earned last year.
Image source: Nu Holdings.
The outsized revenue and earnings growth rates suggest that Nu Holdings still has a lot of juice left in the tank. As long as the business continues to execute well, it’s reasonable to expect years of double-digit growth. Analysts estimate that Nu will grow earnings by approximately 50% annually over the next three to five years.
A compelling valuation that leaves some wiggle room for error
Annualized 50% earnings growth is a high bar to clear, but I think the stock will be a winner even if it falls a little short of that. Why? Because the stock’s valuation leaves a hefty margin of safety at the current share price. Currently, Nu Holdings trades at a forward price-to-earnings (P/E) ratio of 28.
I like using the price/earnings-to-growth (PEG) ratio to weigh a stock’s valuation against the company’s anticipated growth. Traditionally, a good value would be a PEG ratio of 1.0, though I routinely pay up to a PEG of around 2.0 for a high-quality business. Nu Holdings trades at a PEG ratio of just under 0.6.
Simply put, a P/E ratio of 28 is a bargain for a company that could grow earnings by 50% annually. It’s such a low PEG ratio that it leaves wiggle room if Nu grows earnings more slowly than expected. For example, growing earnings at 28% annually, almost half the current estimate, prices the stock at a PEG ratio of 1.0 –that’s still a great value!
It’s a risk-reward dynamic overwhelmingly skewed toward good things happening for the stock in the future, barring a collapse of Nu’s business performance. I don’t think such a collapse is likely, making Nu Holdings arguably the best bank stock you can invest $500 into now.