There may only be one month left in the year, but Warren Buffett and his company Berkshire Hathaway (BRK.A -1.97% )(BRK.B -1.93% ) are far from complete in 2021. Before the start of 2022, they will be looking for a huge payoff on their $ 500 million investment in fast-growing Brazilian digital bank Nu Holdings, which I’ll call Nubank. The company is expected to go public in December and raise more than $ 3 billion, with a value of up to $ 50 billion. Should we invest alongside Buffett and Berkshire? We will take a look.
An incredible growth story
Nubank has been able to significantly disrupt the Brazilian banking market, which is full of competitors who charge high fees and make banking very complex for consumers. By comparison, Nubank is a digital bank that offers a no annual fee credit card, debit cards and cash management accounts, payment services, installment loans, and the ability to invest online. Nubank primarily serves customers in Brazil and Mexico, but is expanding to other parts of Latin America as well.
If you think FinTech companies in the United States have grown rapidly, then Nubank will really blow your mind. Chime, considered one of the most popular neobanks in the United States, if not the most popular, now has around 13 million customers. Nubank has acquired 48.1 million customers, with over 35 million monthly active customers. About 47 million of these customers are consumers, while Nubank also has 1.1 million small and medium-sized businesses.
And Nubank is acquiring these customers for less than likely any fintech in the world. The customer acquisition cost for the first nine months of 2021 was only $ 5 per customer, also with a very low net churn rate. In the United States, customer acquisition costs in the credit card, retail check and consumer credit industries typically range from $ 250 to $ 1,500 per customer. Even the acquisition of clients in the highly touted fintech SoFi was $ 40 per customer.
It’s fair to say that Latin American customers love Nubank. They gave the company a Net Promoter Score, a measure of the likelihood that a customer would recommend a business to a friend, of 90 in Brazil and 94 in Mexico. I haven’t seen such high Promoter Net Scores at any other company, although I suspect the number might be a bit inflated given that millions of customers get their first credit card or bank account with Nubank. . In addition, Nubank is likely to steal many customers underserved by traditional banks in the region.
The big risk
The big risk with Nubank is its massive valuation. If it went public at $ 50 billion, that would mean it would start trading at nearly 36 times revenue, assuming Nubank maintains a quarterly income rate of $ 354 million and makes about $ 1.4 billion. dollars of revenue in 2021.
Although Nubank has low customer acquisition costs, it still has a long way to go to become more profitable. Its Average Monthly Income Per Active Customer (ARPAC) is less than $ 5, largely because most of its products don’t have excessive fees. Not only does Nubank estimate that ARPAC is 10 times higher in banks in Brazil, fintechs in the United States also appear to generate much higher ARPACs.
I also wonder whether more competitors are entering Latin America. Net promoter scores at Nubank show that there is a serious need for better and cheaper FinTech banking solutions. This situation reminds me a little of online brokerage Robin Hood (HOOD -4.17% ) and when he first introduced commission-free trading. The company garnered a lot of attention, a solid valuation, and the first-mover advantage, which helped Robinhood capture 18 million accounts. But the stock has struggled since its IPO and I think part of this is because many competitors now also offer commission-free trades. Competition and the fact that Robinhood is lighter on costs partly explains why its current model, despite its success, still has a long way to go before it reaches profitability. It’s not an apples-to-apples comparison, but I see some similarities.
Finally, whether we like it or not, banking is a business that is strongly tied to the economy, and the economy of Brazil and Latin America can be erratic at times, with high inflation and slow economic growth.
Buffett entered at a better price
When Buffett and Berkshire invested $ 500 million in Nubank in June, it was only valued at around $ 30 billion, which is hardly a small estimate. So if Nubank opens with a valuation of $ 50 billion, Buffett will be up. But for us retail investors, the outlook is much less attractive at $ 50 billion.
Make no mistake, Nubank is a fantastic growth story and I could definitely envision a valuation of $ 50 billion someday. But if we are investing $ 50 billion, we would need that market cap to grow much more to make this investment attractive. That is why I would advise against investing in Nubank right away and trying to buy at a lower valuation.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.