Introduction
In the rapidly evolving landscape of financial services, neobanking has emerged as a disruptive force, offering digital-only banking alternatives to traditional financial systems. According to Statista, the neobanking sector is projected to reach an astonishing $8.8 trillion by the year 2027, with an average transaction value per user amounting to $18.08k as of 2023 (Statista, 2023). One player that has capitalized on this trend with remarkable success is Nubank, a Sao Paulo-based neobank, which has become the largest fintech bank in Latin America. With a market capitalization surpassing $45 billion as of 2022 (“What is Nubank?”, Apptunix, 2022), Nubank offers an expansive array of financial products and services, ranging from insurance and loans to savings accounts. This report aims to provide an in-depth analysis of Nubank, examining its business model, financial health, growth prospects, and competitive positioning, to offer a comprehensive investment perspective.
Market Overview
The global neobanking market is rapidly expanding, with a current market size valued at USD 96.14 billion in 2023. The market is projected to reach USD 2,048.53 billion by 2030, growing at a CAGR of 54.8% between 2023 and 2030 (Grand View Research, 2023). North America, Europe, Asia Pacific, and Latin America are key regions contributing to this growth, with key companies including Atom Bank PLC, Fidor Bank Ag, and Monzo Bank Limited, among others.
Nubank’s Position in the Market
As of July 2023, Nubank has surpassed 80 million customers in Brazil and has a total of 85 million customers across Latin America. These numbers have more than doubled over the past two years, demonstrating rapid customer acquisition and market penetration (Nubank Official, 2023). Notably, the Brazilian Central Bank has positioned Nubank as the country’s fourth-largest financial institution in terms of customer numbers, showing a remarkable rise in rankings within a short period (Nubank Official, 2023).
Regulatory Environment
Brazil has been proactively modernizing its financial system. Significant regulations affecting fintech and neobanks include rules for payment institutions and arrangements in 2013, permissions for limited loan offerings on electronic platforms in 2018, and kickstarting the open-banking process in 2019 (EconAmericas, 2020).
Consumer Behavior and Adoption Rates
Globally, 27% of consumers have relationships with neobanks, with higher adoption rates in the Asia-Pacific region and Latin America. Among these consumers, 20% are aged 25-34, showing well-balanced rates of adoption across other age segments (EY, 2021). In terms of interest rates, Brazil, Colombia, and Mexico are experiencing relatively high rates, which could influence consumer behavior in these regions (Trading Economics, 2023).
Competitive Dynamics and Future Trends
Neobanks have a competitive edge in digital payments, a core service that is especially crucial in some markets. Consumers who choose neobanks for their PFRs (Primary Financial Relationship) have an average of 3.0 relationships with financial services firms, indicating a fragmentation that is a threat to incumbents (EY, 2021). The rise of “super apps” also suggests that neobanks have an opportunity to play an aggregator role, providing seamless integration of financial services (EY, 2021).
Executive Summary
Nubank has shown robust growth in revenues and assets over the years from 2018 to 2022. However, it has also seen periods of losses, marked by a substantial loss in 2021, followed by a rebound in net income in 2022. Despite operational setbacks, the company appears to have made progress in its core business, which is reflected in its significant increase in total assets, especially cash and equivalents. Following data gathered from Seeking Alpha (2023)
Income Statement Analysis
Revenue
- The company has shown impressive growth in “Revenue Before Loan Losses,” growing from $273.5 million in 2018 to $4,483.7 million in 2022.
- Commission and fees have also shown a steady increase, nearly tenfold from $157.4 million in 2018 to $1,406.3 million in 2022.
Net Income
- After suffering losses in 2021 with a net income of -$364.6 million, the company rebounded in 2022 with a positive net income of $76.8 million.
Expenses
- Provision for loan losses increased significantly from $118.6 million in 2018 to $1,855.9 million in 2022, indicating a potential risk in the loan portfolio.
- Operating expenses also rose from $188.3 million in 2018 to $1,921.2 million in 2022 but are in line with the company’s revenue growth.
Earnings per Share (EPS)
- Basic EPS improved from -$0.08 in 2021 to $0.02 in 2022, indicating an improvement in profitability.
Balance Sheet Analysis
Assets
- Cash and equivalents have seen a significant jump from $379.2 million in 2018 to $6,175 million in 2022.
- Total assets grew from $2,785.8 million in 2018 to $33,608.1 million in 2022, indicating a healthy expansion.
Liabilities
- Total Deposits grew substantially from $628.7 million in 2018 to $18,033.7 million in 2022, providing a stable financing base.
- Total liabilities also increased but are proportionate to the growth in assets.
Equity
- Total equity has been steadily increasing, suggesting the business is creating value for shareholders.
Cash Flow Analysis
- The company moved from a net income loss of $28.6 million in 2018 to a gain of $76.8 million in 2022, showing its potential for positive cash generation.
Key Ratios
- Revenue Per Share increased from $0.14 in 2018 to $0.56 in 2022.
- Book Value per share increased from $0.27 in 2018 to $1.19 in 2022, an encouraging sign for investors.
Summary and Recommendations
- Nubank has shown remarkable growth over the past few years, although it has also experienced periods of losses.
- The surge in provision for loan losses needs to be monitored, as it can be a risk factor for future profitability.
- The company’s growing deposits and cash reserves place it in a strong position to expand further.
Market Expansion and Regulatory Moves
One of the most recent significant developments for Nubank is its application for a banking license in Mexico. The firm is already well-established in the country, with more than $1.3 billion invested over the past three years. Nubank seeks to further expand its product offerings in Mexico, including features such as payroll portability, investments, and higher deposit limits. According to Nubank’s statement, the firm’s capitalization ratio under traditional banking regulations would be near 40%, which is remarkably higher than the current sector average (Dow Jones Newswires,2023).
Key Investments and Financial Performance
Investment from Warren Buffett’s Berkshire Hathaway has significantly bolstered Nubank’s financial position. Initially, Berkshire invested $500 million in June 2021, followed by an additional $250 million during the company’s IPO in December of the same year. This investment has been rewarding for Berkshire Hathaway, as Nubank’s stock has surged by 93% this year, marking it as the best-performing stock in Berkshire’s portfolio. Furthermore, the stock has grown its customer base by 28% to 84 million and increased its revenue by 61% to nearly $1.9 billion from June of last year to this year. The company has also transitioned from a $30 million net loss to a $225 million net profit over the same period (Markets Insider, 2023).
Analysis of Financial Indicators and Risk Factors
The wide range of analyst ratings, from $4 to $16 (TradingView, 2023)., suggests that there is a level of market uncertainty or volatility surrounding Nubank. However, strong financial performance indicators, such as significant customer and revenue growth, point toward a robust business model. The investment by Berkshire Hathaway, a conglomerate known for its thorough analysis and long-term investing strategy, adds an extra layer of credibility.
On the downside, the stock has slid 13% from its IPO price, signaling market volatility and inherent risk. Moreover, given that Nubank allows cryptocurrency trading, it presents a risk factor especially considered against Warren Buffett’s public skepticism towards digital currencies. Lastly, while expanding to new markets like Mexico could yield high returns, it also introduces regulatory and operational risks.
Figure 1 Chart of NYSE:NU, Source: Tradingview.com, 2023 Edited by the Author
Technical Analysis
As of October 21, 2023 Nu bank currently holds a price of $8.17 USD.
Delving into the chart patterns, a distinct triangle formation characterized by points A, B, C, and D emerges. Commonly recognized as a continuation pattern, this triangle suggests that the stock is undergoing a consolidation phase and might soon continue in its prevailing trend direction. The narrowing ranges observed between points A, B, C, and D are typical of such patterns, indicating that the stock is making lower highs and higher lows.
The trajectory of this triangle is pivotal. An upward breakout from the descending trendline that connects points A to C could lead to a continuation of the stock’s bullish trend. In this scenario, one could expect the potential target price to be calculated by adding the height of the triangle to the breakout point. Conversely, a downward breakout below the ascending trendline connecting points B to D might signal a potential bearish reversal. Here, the target could be estimated by subtracting the triangle’s height from the breakout point.
In addition to the triangle formation, other technical indicators provide insight into the stock’s momentum. The stock’s position above both its 200-day and 50-day moving averages undeniably suggests bullish sentiment. The Relative Strength Index (RSI) hovers at 65.69, approaching the overbought territory. This close proximity indicates that while the stock enjoys positive momentum, caution is advised if the RSI crosses into overbought realms. Complementing this is the Moving Average Convergence Divergence (MACD) indicator, with the MACD line residing above the signal line, reinforcing the existing bullish momentum.
The volume is another essential factor in this equation. For the triangle pattern’s breakout to be validated, a spike in volume would be crucial. Traders and investors should keenly observe for this, as a breakout accompanied by robust volume often strengthens the pattern’s credibility.
Conclusion
After an extensive analysis of Nubank’s financial health, business model, growth prospects, market position, and technical indicators, we believe the company is well-poised for growth in the rapidly expanding neobanking sector. Despite facing challenges and periods of losses, Nubank has displayed a strong rebound and remarkable growth, especially in customer acquisition and revenue. The company’s successful market expansion, significant investments, and robust financial performance further reinforce its potential. Notably, technical indicators such as the triangle formation and the stock’s position relative to its moving averages signal bullish momentum.
While Nubank’s current stock price appears relatively high, especially when considering its P/E ratio of 580, the company has shown promising growth. Recently, Nubank has begun to post profits, which is a positive sign for its financial health. This indicates a potential shift in its earnings trajectory and could lead to a more reasonable P/E ratio in the future.
Taking into account all the aforementioned factors and its current stock price of $8.17 USD, our rating for Nubank (NYSE: NU) is “Buy.” However, investors should remain cautious given the stock’s inherent market volatility, potential regulatory and operational risks associated with expansion into new markets, and the broader macroeconomic factors that could impact the stock’s performance.
Reference list
Akhil. “What Is Nubank? A Dissection of the Largest Neobank.” Apptunix Blog, 7 Feb. 2023, www.apptunix.com/blog/what-is-nubank/. Accessed 21 Oct. 2023.
Bellens, Jan , et al. “How Can Banks Transform for a New Generation of Customers?” Www.ey.com, 7 Oct. 2021, www.ey.com/en_au/banking-capital-markets/how-can-banks-transform-for-a-new-generation-of-customers.
Dow Jones Newswires. “News by Dow Jones Newswires on TradingView, 2023-10-19.” TradingView, 20 Oct. 2023, www.tradingview.com/news/DJN_DN20231019007117:0/. Accessed 21 Oct. 2023.
Gómez, Paz. “Neobanks a Game-Changer for Unbanked in Brazil.” Econ Americas LLC, 9 Sept. 2020, econamericas.com/2020/09/neobanks-a-game-changer-for-unbanked-in-brazil/. Accessed 21 Oct. 2023.
Grand View Research. “Neobanking Market Size, Share | Industry Report, 2021-2028.” Www.grandviewresearch.com, 2022, www.grandviewresearch.com/industry-analysis/neobanking-market. Accessed 21 Oct. 2023.
Mohamed, Theron. “Warren Buffett’s Berkshire Hathaway Has Likely Scored a 93% Gain on Nubank Stock This Year, Making the Crypto-Friendly Bank Its Best Performer.” Markets Insider, 12 Oct. 2023, markets.businessinsider.com/news/stocks/warren-buffett-berkshire-hathaway-nubank-stock-performance-portfolio-crypto-bank-2023-10. Accessed 21 Oct. 2023.
“Nu Holdings Ltd.” Tradingview, 21 Oct. 2023, www.tradingview.com/chart/GWzBSZFD/?symbol=NYSE%3ANU. Accessed 21 Oct. 2023.
“Nu Holdings Ltd. (NU) Financials: Income Statement.” Seekingalpha.com, 20 Oct. 2023, seekingalpha.com/symbol/NU/income-statement. Accessed 21 Oct. 2023.
Nubank. “Nubank Reaches 80 Million Customers in Brazil.” Nu International, 25 July 2023, international.nubank.com.br/company/nubank-reaches-80-million-customers-in-brazil/. Accessed 21 Oct. 2023.
Statista . “Neobanking – Worldwide | Statista Market Forecast.” Statista, 2023, www.statista.com/outlook/dmo/fintech/neobanking/worldwide. Accessed 21 Oct. 2023.
Trading Economics. “Interest Rate – Countries – List.” Tradingeconomics.com, 21 Oct. 2023, tradingeconomics.com/country-list/interest-rate. Accessed 21 Oct. 2023.
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