Two investors who couldn’t be more opposite are Cathie Wood and Warren Buffett. Wood is the CEO and Chief Investment Officer of Ark Invest, a firm that focuses on investments in emerging topics such as artificial intelligence (AI) or genomics. By contrast, Buffett spent most of his tenure in Berkshire Hathaway own blue chip stocks as opposed to higher risk, volatile opportunities in growth sectors.
Yet despite their different philosophies, Wood and Buffett have some overlap between their respective portfolios. A company that Ark and Berkshire both own is named Now Holdings(NYSE: NOW). Now a fintech actor that focuses specifically on Latin America and South America.
We dive into why Nu now looks particularly attractive from a valuation perspective and make the case that 2025 could be a breakout year for this under-the-radar trading opportunity.
Nu is a digital financial services platform that provides its users with an inclusive suite of products ranging from checking and savings accounts, investment, loans, and more. For most of its history, Nu has focused on markets such as Brazil, Colombia and Mexico.
However, in December the company announced it was participating in an investment round for digital banking platform Tyme Group – which boasts 15 million customers in South Africa and the Philippines.
At the end of the third quarter (ended September 30), Nu had 110 million members on its platform, which reported 23% year-on-year growth. In addition, the company’s average revenue per user (ARPU) gradually increased to $11 per member.
By making their customers more profitable over time, Nu was able to widen their margins and expand profitability. During the third quarter, Nu’s gross margin increased by 300 basis points and net income increased by 83% year over year to $553 million.
Image source: Getty Images.
Per the chart below, Nu trades right in the middle of this peer group of other international fintech operations based on the price-to-sales (P/S) ratio.
While this might imply that Nu is attractively valued relative to this cohort, it is the underlying trend in the company’s P/S that stops me. Nu’s UP/S has been steadily declining in recent months. I think a major reason for this revolves around the macroeconomic conditions throughout Latin America, particularly in Brazil.
Although such concerns are valid, I don’t quite see this dynamic as a reason to sell the stock.
A stock that has had a hard time for the last two years is SoFi. SoFi is a very similar business to Nu in that it offers many of the same basic financial services, all through the convenience of a mobile app.
Although SoFi has a number of different products, the company’s largest source of revenue by a mile derives from lending. Since the United States has experienced abnormally high levels of inflation in recent years, the Federal Reserve has resorted to some aggressive changes in monetary policy – increasing borrowing costs 11 times between 2022 and 2023. These moves have had a significant impact the loan operation of SoFi, and for a long time. a period of time that investors flee the stock.
However, the economic picture began to improve, and in the last months of last year, the Fed began to aggressively lower interest rates. Unsurprisingly, SoFi began to witness a rapid recovery in its lending business, and enthusiasm around the stock began to grow. Since the first rate cut in mid-September, SoFi shares have risen more than 80%.
Concerns about inflation and its growth on SoFi’s business show a concern parallel to that of Nu now, given the company’s exposure and vulnerability to a challenging economic environment in Brazil. But with that said, investors should zoom out and remember that economic conditions will eventually begin to change and improve in the long run.
For me, the concerns surrounding Nu’s near-term growth are valid. But the long-term picture still looks incredibly robust — underscored by the company’s growing user base, cross-selling opportunities, growing profits and economic expansion.
I see Nu following a similar trajectory to SoFi and think the stock is a bargain for investors with a long-term mindset.
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Adam Spatacco has positions in SoFi Technologies. The Motley Fool has positions and recommends Adyen, Berkshire Hathaway and StoneCo. The Motley Fool recommends Nu Holdings and PagSeguro Digital. The Motley Fool has a disclosure policy.
