When they work out well, growth stocks pretty much do what they say on the tin. They grow, sometimes a lot, creating wealth for patient investors who spied their potential years before.
The key to growth investing is finding durable improving businesses and not paying the earth for their shares. With this in mind, here’s one stock whose growth potential I’m excited about over the next decade.
Massive growth opportunity
Nu Holdings (NYSE:NU) is the parent company of Nubank, the biggest digital bank in Latin America. In the second quarter, it served an incredible 139m customers, up 13% year on year.
Despite this already large number, the company looks to have enormous growth potential left. For a start, it’s only operating in three countries so far (Brazil, Mexico and Colombia), but intends to expand further, including into the US.
I’m bullish on the firm’s prospects in the US because there’s a massive pool of potential Hispanic customers there. The remittance and cross-border payment flows between the US, Mexico, and South America are significant.
In Mexico, Nu only serves 16.5% of the adult population today. And a large proportion of the Mexican population remains unbanked and underbanked, with 85% still preferring cash transactions. Credit card penetration is just 16%.
In Brazil, the firm’s largest and most mature market, the digital bank is targeting higher-income customers. It already serves more small businesses than any other financial institution in Latin America’s largest economy.
A Nu milestone reached
Thirteen years ago we started with a simple hypothesis: that a bank built on technology, with no branches and no legacy to defend, could serve hundreds of millions of people better, and at a fraction of the cost. This is no longer a hypothesis, and we are now generating more than a billion dollars in quarterly net income.
CEO David Vélez.
In Q2, the Brazilian company reached a milestone when it reported quarterly net income of $1bn+ for the first time. This was on revenue of $5.5bn, up 39% on a constant currency basis.
Average revenue per active customer reached $17, up from $8 four years ago. But it’s far higher for mature cohorts, indicating that Nu has embedded growth potential from existing customers, not just from adding more users.
For me, passing the $1.1bn quarterly net income milestone, while maintaining a 33% return on equity, demonstrates the high compounding power of this digital-first business model.
What about valuation?
As bullish as I am, there are risks, as always. One is that US expansion might result in disappointing monetisation rates compared to Brazil. This could dent investor confidence in the international growth opportunity.