A Shared Interest: Cathie Wood and Warren Buffett's Bet on Nu Holdings

Cathie Wood and Warren Buffett may have vastly different investment philosophies, but both investors hold a stake in a lesser-known rising star in the fintech realm, Nu Holdings.

Cathie Wood, the CEO and chief investment officer of Ark Invest, is known for her focus on innovative sectors such as artificial intelligence and genomics. In contrast, Warren Buffett, the chairman of Berkshire Hathaway, has primarily favored blue-chip stocks with stable earnings rather than diving into higher-risk growth opportunities.

Despite their distinct approaches, Wood and Buffett both recognize the potential of Nu Holdings, a fintech company targeting markets in Latin and South America.

Robust Operating Performance of Nu

Nu is a digital financial services platform offering various products, including checking and savings accounts, loans, and investment services. Although Nu initially concentrated on Brazil, Colombia, and Mexico, it has recently expanded its reach. In December, the company announced its participation in an investment round for Tyme Group, a digital bank with 15 million customers across South Africa and the Philippines.

As of the third quarter ending September 30, Nu had 110 million active members on its platform, indicating a substantial year-over-year growth of 23%. Additionally, the average revenue generated per user (ARPU) increased to $11.

Nu has succeeded in improving its profitability over time, with its gross margin rising by 300 basis points, and its net income surged by 83% year-over-year, reaching $553 million.

Attractive Valuation Amid Growth Potential

Looking at Nu's price-to-sales (P/S) ratio, it positions itself competitively within a group of international fintech companies. This suggests that Nu's valuation may be attractive compared to its peers. Interestingly, Nu's P/S ratio has been declining recently due to macroeconomic challenges in Latin America, particularly in Brazil.

While these concerns could be valid, they should not immediately lead investors to sell their shares in the company.

Resemblance to SoFi's Journey

Nu’s situation is reminiscent of SoFi, another fintech entity that has experienced tough times over the past few years. SoFi provides financial services similar to Nu, primarily through a mobile platform. Its principal revenue source is lending, which suffered due to the Federal Reserve's monetary policy changes aimed at curbing inflation, leading to frequent interest rate hikes.

However, as economic conditions began to stabilize and the Fed started to lower interest rates, SoFi saw a revival in its lending segment, resulting in an impressive surge of over 80% in its stock price since September's initial rate cut.

Nu faces similar anxieties concerning its growth amid Brazil’s economic challenges. Investors should look beyond the immediate obstacles, as the overall economic landscape tends to improve in the long run.

In conclusion, while near-term growth for Nu may face challenges, the long-term prospects appear exceptionally promising. The company is showing increasing user adoption, potential for cross-selling, rising profits, and benefits from broader economic expansions. As such, Nu could mirror SoFi’s impressive recovery trajectory, making it a compelling option for long-term investors.

investment, fintech, growth