There may only be a month left in the year, but Warren Buffett and his company Berkshire Hathaway are far from done in 2021. Before 2022 begins, they will be looking for a huge gain on their $500 million investment in the fast-growing Brazilian digital bank Nu Holdings, which I’ll refer to as…
Nubank. The company is expected to go public in December and raise more than $3 billion, valuing it as high as $50 billion. Should you invest alongside Buffett and Berkshire? Let’s take a look.
An incredible growth story
Nubank has been able to significantly disrupt the Brazilian banking market, which is filled with competitors that charge high fees and make banking very complex for consumers. In comparison, Nubank is a digital bank that offers a credit card with no annual fees, debit cards and cash management accounts, payment services, installment loans, and the ability to invest online. Nubank mainly serves customers in Brazil and Mexico, but is also expanding to other parts of Latin America.
If you think fintech companies in the U.S. have grown quickly, then Nubank will truly blow you away. Chime, believed to be one of, if not the most popular neobank in the U.S., has grown to roughly 13 million customers. Nubank has acquired 48.1 million customers, with more than 35 million monthly active customers. Roughly 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 cheaper than probably any fintech in the world. Customer acquisition cost for the first nine months of 2021 was only $5 per customer, with very low net churn as well. Customer acquisition costs in the U.S. in the credit card, retail checking, and consumer finance sectors typically range from $250 to $1,500 per customer. Even customer acquisition at the highly touted fintech SoFi was $40 per customer.
It’s fair to say that customers in Latin America love Nubank. They have awarded the company with a net promoter score, a measure of how likely a customer is to recommend a company to a friend, of 90 in Brazil and 94 in Mexico. I haven’t seen net promoter scores that high at any other company, although I suspect the number might be a little inflated considering millions of customers are getting their first credit card or bank account with Nubank. Also, Nubank is likely stealing lots of customers who were poorly served by traditional banks in the region.
The big risk
The big risk with Nubank is its massive valuation. If it were to go public at $50 billion, that would mean it would start trading at nearly 36 times revenue, assuming Nubank continues a quarterly revenue run rate of $354 million and does about $1.4 billion in revenue in 2021.
While Nubank has low customer acquisition costs it still has a lot of work to do to become more profitable. Its monthly average revenue 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 the ARPAC is 10 times higher at banks in Brazil, but fintechs in the U.S. also seem to be generating much higher ARPACs as well.
I do also wonder about more competitors jumping into Latin America. The net promoter scores at Nubank show there is a serious need for better and cheaper fintech banking solutions. This situation makes me think a little bit about the online brokerage Robinhood (NASDAQ:HOOD) and when it first introduced commission-free trading. The company got a lot of attention, a strong valuation, and the first-mover advantage, which has helped Robinhood capture 18 million accounts. But the stock has struggled since going public and I think that partly has to do with the fact that lots of competitors now also offer commission-free trading. The competition and the fact that Robinhood is lighter on fees is part of the reason that its current model, despite its success, still has a long way to go before reaching profitability. It’s not an apples-to-apples comparison, but I see some similarities.
Lastly, like it or not, banking is a business that is heavily tied to the economy, and Brazil and Latin America’s economy can be erratic at times, with high inflation and slow economic growth.
Buffett got in at a better price
When Buffett and Berkshire invested $500 million into Nubank in June, it was only valued at…
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