Buffett-Backed Nubank Prepares for IPO This Week

(rafapress)
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The Brazilian fintech giant Nubank (Nu Holdings) is scheduled to price its IPO tomorrow and go public this week on the NYSE with the ticker symbol NU. Nu Holdings is well-known for being backed by Warren Buffett’s Berkshire Hathaway. In its latest amended F-1 filing, the company lowered its proposed IPO share price to $9 from the previously reported range of $10-$11. This morning, we’ll take a quick look through the company’s IPO prospectus.

See the entire 300+ page prospectus here.

  • December 10 (edit): Nu Holdings (NU) went public yesterday and closed at $10.33 per share after officially pricing its IPO at $9.00 per share.
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Company Overview

  • Nu is one of the world’s largest digital banking platforms based on the number of customers with 48.1 million users across Brazil, Mexico, and Columbia as of Sept. 30, 2021.
  • The company’s mission is to fight complexity to empower people in their daily lives.
  • Nu started its efforts in 2013 by breaking into the financial services market in Latin America. The company estimates the market value of the market is ~$1 trillion in 2021 with nearly 650 million people in LatAm according to the World Bank. Many are underbanked or completely unbanked.
  • The company has developed a suite of financial solutions across the Five Financial Seasons of a consumer or SME consumer’s journey:
  1. Spending: Credit cards and debit cards, QR code-based and PIX instant payment arrangements, WhatsApp Pay and wire transfers.
  2. Saving: NU personal and business accounts.
  3. Investing: Direct-to-consumer NuInvest digital investment platform.
  4. Borrowing: Transparent, easy-to-manage credit cards and personal loans.
  5. Protecting: Insurance solutions.

Customers / Unit Economics

  • Nu has built a strong reputation with customers in Latin America. As a result, approximately 80% – 90% of annual acquired customers have been gained organically on average per year since the company’s inception.
    • Nu received a Net Promoter Score (NPS) of 90 in Brazil and 94 in Mexico.
    • Of the 48.1 million customers, 762,000 were in Mexico and 37,500 customers were in Colombia meaning the vast majority of customers are in Brazil (>98%).
  • The strong reputation and organic growth has kept customer acquisition costs (CAC) low while continuing to expand revenue and contribution margins.
    • Nu estimates its lifetime value (LTV)/CAC ratio to be over 30x.

Factors Affecting Performance

  • Ability to attract and retain monthly active customers
  • Ability to increase transactions and expand revenue from existing customers
  • New products and adoption
  • Continued international expansion
  • Risk management
  • Regulation
  • Macroeconomic environment (Brazil, Mexico, Colombia)

Financials

  • Revenue
    • Total revenue for the nine months ended Sept 30, 2021 was $1,062 million, nearly doubling (+98.7%) from the nine month period ending Sept 30, 2020.
      • This was attributed to interest income from the loan portfolio and credit card receivables. The customer base grew from 29.7 million to 48.1 million in the period (+62%).
    • Approximately 57% of total revenue in the period was generated from interest income.
  • Gross Profit | For the same period as above, gross profit totaled $506 million (47.6% margin).
  • Operating Expenses
    • Marketing expenses are relatively low (~4% of total revenue), but the company is still operating at a loss due to other operating expenses.

Valuation

  • In July, Berkshire Hathaway announced a $500 million stake in Nubank valuing the company ~$30 billion. The company also has investments from Sequoia, DST, Tencent, and Tiger Global.
  • In its IPO, Nu will have Class A ordinary shares on the NYSE and Brazilian despositary receipts trading on the Sao Paulo stock exchange.
  • The company is scheduled to set its IPO price tomorrow which will give us a better idea on valuation. If the $9.00 reference price holds, the company will be valued ~$41.5 billion in market cap.
  • Before Covid-19, Nubank grew revenue 80% in 2018 and 90% in 2019 before the pandemic pulled growth down to 20% in 2020.
  • If we estimate that Nu stays on track to double revenues this year and potentially doubles revenue again in 2022, that would be ~$2.95 billion in revenue.
  • Gross profit margin has steadily increased from 2018 to 2020 coming in at 35%, 40.5%, 44.3%, respectively. Gross profit margin for the first nine months of 2021 was 47.6%. If we give Nu the benefit of the doubt and estimate 50% gross margins in 2022, we’re looking at ~$1.48 billion in gross profit. With this back-of-the-envelope math (with aggressive assumptions), NU would be trading around 28x FY22 gross profit still growing rapidly.

Bottom Line: $NU is definitely in the high-growth, high-valuation category, but it’s one that looks like it’s good quality with room to expand into a large, untapped market. But there are concerns about the macroeconomic environment surrounding Brazil. We have seen other high-profile Brazilian company’s fall in recent months as the country suffers from higher unemployment and higher inflation (10.7% in November). Another Buffett-backed Brazilian company, StoneCo (STNE) has fallen 72% in the past six months. It’s important to have a better understanding of the Brazilian macro-environment before coming to a definitive conclusion.

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