- Nubank is expected to report strong earnings in the second quarter of 2023.
- The company is also expected to add millions of new customers, particularly in Mexico.
- Is it still a good time to buy the stock, considering its 90% rally in 2023?
Warren Buffett-backed fintech giant, Nubank (NYSE:), is gearing up to unveil its second-quarter 2023 earnings. On August 15, the digital bank will reveal its performance between April and June of this year, with expectations set on maintaining the positive momentum from the first quarter.
In May, the Brazilian-based company achieved its highest net profit in history, surpassing $140 million. In the same period of 2022, Nubank reported a loss of around $45 million. This is a significant leap, especially considering the company's financial performance, which had been trailing behind, and its stock since its IPO was not up to the mark.
Nubank's shares had witnessed a 24.2% decline since its December 10, 2021 IPO. However, things have turned around this year, as the stock has rallied 90% YTD. Expectations are that Nubank's revenue for the second quarter could be around $1.76 billion, with earnings per share expected to reach $0.041/share.
In preliminary figures announced in July, Nubank stated it had 80 million customers solely in Brazil, making it the fourth-largest bank in the country by customer count, surpassing the state-owned Banco do Brasil, the country's oldest bank.
As profitability soars, and numbers keep growing, the question that pops into investors' minds is: Was Warren Buffett right all along yet again?
Nubank's Journey So Far
Nubank celebrated its 10th anniversary in May of this year, achieving profit in several quarters within that time frame. This Brazilian fintech burned cash to become a key player in the payment revolution over the last decade in the largest economy of Latin America.
Starting with credit card services, it expanded to offer banking accounts and gradually introduced insurance and investment services to its portfolio.
The company's revolution wasn't just about providing services through a mobile app during a period when the five largest Brazilian banks (Itau Unibanco (NYSE:), Banco Bradesco (NYSE:), Banco Do Brasil (OTC:), and Caixa Economica Federal) invested little in innovation and faced customer complaints regarding high fees and costly services.
Nubank's disruptive narrative and bold advertisements played a role, along with substantial investments from funds like Sequoia Capital, Kaszek Ventures, and Founders Fund, among others, to finance expansion when revenue generation was still modest.
The latest addition to Nubank's list of investors is mega-investor Warren Buffett. The Oracle of Omaha holds a stake in the Brazilian company through Berkshire Hathaway (NYSE:), with two investments: $500 million in June 2021, before Nubank's IPO on the New York Stock Exchange in December of that year, and another $1 billion in December 2021, post-IPO.
Nubank Earnings: What to Watch Out For?
One of the metrics closely watched by the market is Nubank's customer growth. In Q1 2023, the fintech reached 79.1 million users, a 33% increase from the same period in 2022. While more than 75 million customers are from Brazil, the over 3 million customers in Mexico also marked a positive note, and this will likely continue to be of interest in the upcoming disclosure. More customers naturally mean more revenue.
The metric is even more significant for the bank due to Brazil's persistently high interest rates. While the rate was lowered by the Central Bank to 13.25% in the latest meeting of the Monetary Policy Committee on August 2, the rate is still comparatively high.
The banking sector felt the impact, yet Brazilian banks remained resilient in the past months and avoided bank runs that occurred in the United States after the failures of Silicon Valley Bank and First Republic Bank. Additionally, Nubank managed to significantly expand its user base.
Another key point is that Nubank's over 79 million users considerably surpass its competition. SoFi (NASDAQ:), one of the fastest-growing digital banks in the US, has fewer than 6 million users. It's worth noting that Nubank doesn't operate in the US.
However, its Brazilian rival, Banco Inter (NASDAQ:), reported 13.5 million customers in Q1 2023. The former PagSeguro, now PagBank (NYSE:), had 28.7 million users by the first quarter of this year. Both competitors are also listed in New York.
Nubank is also striving to expand its corporate customer base. In the first quarter, the number of small and medium-sized businesses served increased to 2.7 million, a year-on-year growth of 67%. It's important to mention that almost 60% of corporate customers are micro, small, and medium-sized enterprises (MSMEs), with 10 million customers being entrepreneurs.
Challenges in the Socio-Economic Landscape
Despite its popularity in Brazil, Nubank is still more prevalent among lower-income classes. With the high-interest rates in the country over the past years, delinquency rates also rose, reaching 5.5%, which is below the market average of 6%. However, the trend is expected to improve as the Brazilian interest rate continues to decrease in the coming months, which presents a positive outlook for the Fintech company.
Furthermore, the Brazilian government recently announced the 'Desenrola Program' with the aim of reducing the number of delinquent individuals in the country. Although Nubank was one of the last financial institutions to join the process, it hopes to benefit from the program by renegotiating these debts to increase loan granting while simultaneously reducing default rates. Under the "Desenrola" initiative, debts up to R$100 are automatically canceled, benefiting 1 million Nubank customers.
Another challenge faced by the bank is the low average transaction amount, again due to its focus on lower-income groups. The increase in revenue and net profit is certainly positive, indicating the company's ability to overcome challenges it has historically faced in the socioeconomic sphere. The 40% ROE announced in May is also notably high, reflecting operational efficiency. However, some analysts have raised doubts about this figure, as only a third of net assets were used to calculate Brazilian operations.
Taking all these factors into account, let's explore what InvestingPro data suggests for Nubank's stocks at the moment.
InvestingPro Fair Value Assessment
Despite its currently low share price, InvestingPro's Fair Value tool suggests that Nubank is currently overvalued – even before the 2Q23 earnings release. The NY-listed NU stock closed at $7.83 on Wednesday, August 9, but its current fair value would be $6.25, indicating a downside of 20%.
Nubank Fair Value
Source: InvestingPro
These are just three valuation models used to assess Nubank's stocks on InvestingPro. Based on Price/Earnings ratios, it would be valued at $6.55. By Price-to-Book ratios, it would be $6.13. Using Price/Sales ratios, it would be $6.07.
However, as previously explained, there's an expectation of even greater revenue and profit growth for the bank due to the decrease in the Selic rate and government stimulus programs.
Financial Health
InvestingPro's Financial Health tool assigns a score of 2.55 to Nubank at the moment. This corresponds to a C rating, slightly below average (ideal is above 2.75), but still considered good within all aspects considered.
Among the tool's five categories, two give Nubank a score of 2: Profit and Relative Value. Three categories score 3: Growth, Price Momentum, and Cash Flow.
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Source: InvestingPro
In the Relative Value category, the low Earnings Yield, which expresses a company's net profit profitability in relation to its market value, drags down the score to 1.7%. Values for Free Cash Flow Growth and Operating Cash Flow Growth are also relatively low. In the Profit category, the 5-year average ROE of -20% impacts the rating negatively.
On the positive side, Growth benefits from higher metrics in Earnings Per Share, Revenue, and Operating Profit. Cash Flow is boosted by Revenue and the Free Cash Flow-to-Total Debt ratio. In Price Momentum, the 6-month and 1-year returns are significant contributors.
Peer Comparison
We've selected some of Nubank's competitors for comparison using InvestingPro's Peer Comparison tool. These are the main rivals in the Brazilian market, including Banco Inter (INTR) and PagBank (formerly PagSeguro), alongside other fintech that operate in the US market but aren't direct competitors since Nubank doesn't operate in the US. However, they have similar business models, including SoFi (NASDAQ:), Intuit (NASDAQ:), Lendingtree (NASDAQ:), and PayPal (NASDAQ:).
Recapping Nubank's metrics (NU):
- Price: $7.83
- Fair Value: $6.25 (-20.2%)
- Financial Health: 2.55 (C)
Inter (NASDAQ:) Price: $3.32
- Fair Value: $4.64 (39.9%)
- Financial Health: 2.94 (C)
PagBank (PAGS) Price: $10.02
- Fair Value: $16.75 (67.2%)
- Financial Health: 3.17 (B)
SoFi (SOFI) Price: $8.99
- Fair Value: $7.32 (-18.6%)
- Financial Health: 2.02 (C)
Intuit (INTU) Price: $496.70
- Fair Value: $524.65 (5.6%)
- Financial Health: 2.94 (C)
LendingTree (TREE) Price: $20.59
- Fair Value: $24.80 (20.5%)
- Financial Health: 1.66 (D)
PayPal Price: $62.02
- Fair Value: $90.14 (45.3%)
- Financial Health: 2.33 (C)
What's your take on Nubank and other digital banks for the short and medium term?
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