What company is Nubank owned by Buffett? How it makes money and its advantages?

Nubank

I mentioned Nubank (ticker: NU), a company invested by Warrent Buffett, in sections 1-3 of my book “The Rules of 10 Baggers“.

Company Profile

Founding of Nubank

The story of Nubank (ticker: NU) begins with a bad bank account opening experience. Its founder is Colombian David Vélez, a former Sequoia Capital partner. In 2011, Veres went to Brazil for inspection and planned to launch Sequoia’s investment business in Latin America. During this period, he spent six months opening an account in Brazil, which made him see the opportunity. When Sequoia Capital shut down its Brazilian business, he stayed on to found Nubank.

Officially established

Nubank was founded in 2013 and is headquartered in Sao Paulo, Brazil. The co-founders are Veres, Cristina Zingaretti Junqueira and Adam Wible.

Growth story

The company launched its first credit card service that can be processed online in 2014, taking the lead in launching a credit card with the newly established Nubank. This credit card has no annual fee, and the entire process can be controlled using the mobile app. The monthly interest rate ranges from 2.75% to 14%. Soon, Nubank’s credit cards successfully opened up the market among potential financial customers not covered by banks. Thanks to word-of-mouth, Nubank has distributed its purple credit card to most parts of Brazil at almost no cost to acquire customers.

By 2017, Nubank’s credit card business entered the profitable stage. In May of the same year, the company obtained a Brazilian banking license and can provide other services such as savings accounts (naturally all digital accounts) and checks. Today, Nubank has extended its reach to markets such as Colombia, Mexico, and Argentina, and its business scope has also expanded to savings, loans, insurance, etc.

LaTAM’s largest fintech unicorn

It took 8 years for 40-year-old Veres to build Nubank into the largest financial technology unicorn in Latin America. Later, it swept across the country, and by 2021, it had nearly 50 million users, making it the king of cards.

Initial public offering

On December 9, 2021, Nubank successfully listed on the New York Stock Exchange for its initial public offering, with a market value of US$47.6 billion.

The company also plans to make approximately $32.2 million in Brazilian depositary receipts (BDRs) available to employees and institutional investors, while also using some of them for customer loyalty programs. BDR will be listed and traded on the Brazilian stock exchange, with a share value of one-sixth of the Class A shares.

Nubank’s Main business

Digital account

In addition to providing international credit cards with no annual fee, Nubank also provides free digital account NuConta and points reward program Nubank Reward, etc. All services are managed based on one application.

Nubank has more than 48 million customers in Brazil, Colombia and Mexico; the company said it added an average of 2.1 million new customers per month in the third quarter of 2021. The company’s revenue in the first nine months of 2021 reached approximately US$1.1 billion, nearly double the same period last year, but its loss also expanded 53.9% to US$99.1 million.

Add-on services

It has diversified its products and now also includes services such as investments, personal loans, instant payments, life insurance and international transfers.

Credit card

Because it is not subject to license restrictions, the threshold for issuing credit cards is not high. Therefore, Nubank began to issue credit cards in 2014, which is a purple MasterCard (ticker: MA) brand credit card. Compared with traditional banks, Nubank’s credit cards have a simplified application process, no annual fees, monthly interest rates ranging from 2.75% to 14%, and the entire process can be controlled using a mobile phone.

Virtual credit card

In 2014, Nubank launched the Mastercard virtual credit card into the market. Credit card applications at most financial institutions in Brazil are not only extremely complicated to apply for, but also have annual interest rates of up to 400%. Nubank’s virtual credit card simplifies the credit card application process and provides fast and transparent banking mobile services, such as transfers, consumption inquiries, bill payments, etc., and the annual interest rate is only 145%. This number may seem high, but Brazilian bank credit card annual interest rates can exceed 600%.

Cryptocurrency

Nubank is friendly to cryptocurrencies, allowing cryptocurrencies to be traded on the platform and even issuing its own native token in March 2023.

The key to success

Almost no cost to acquire customers

A large part of Nubank’s success depends on the success of its credit card business. According to the company’s prospectus at the time, 80%-90% of Nubank’s annual users come through word-of-mouth and free recommendations, which has also contributed to the rapid growth of Nubank’s customers.

Virtual credit card

The cheap and convenient service of virtual credit card was quickly favored by users, and Nubank gained rapid expansion of its user base with low user acquisition costs. The prospectus shows that as of the first three quarters of 2021, the company’s CAC is US$5.0 per customer, of which paid marketing accounts for about 20%, which makes the company’s CAC one of the lowest among global consumer financial technology companies.

Subverting Brazil’s beaucracy banking industry

Nubank’s great success is not only due to the fact that the epidemic has changed the payment methods of Brazilian people, but also related to Brazil’s special financial structure. Historically, Brazil’s banking industry has been highly concentrated, with five banks controlling 85% of the Brazilian market. Brazil’s banking industry has long been one of the most profitable banking industries in the world. Because of this, the cost for ordinary customers to obtain financial services is too high, coupled with the serious lack of penetration and other characteristics, giving many start-up financial companies opportunities.

Operating status

Early operations

Nubank’s revenue in 2018, 2019 and 2020 was US$319 million, US$612 million and US$737 million respectively, with continued growth; Nubank’s losses in these three years were US$28.6 million, US$92.5 million and US$1.715 respectively. One hundred million U.S. dollars.

In 2020, Nubank’s gross profit was US$326.9 million, an increase of 31.9% from US$247.9 million in 2019. In the first nine months of 2021, Nubank’s gross profit was US$506 million, an increase of 101.9% from US$250.6 million in the same period last year.

Although losses are also slowing down, they have not achieved profitability for a long time. In the first nine months of 2021, Nubank lost US$99.1 million, an increase of 49.2% from US$66.4 million in the same period of 2020. In addition, the loss of other local financial institutions in Brazil Due to the competitive situation, Nubank faces considerable pressure on profitability.

Recent operating conditions

Revenue has grown at a compound annual growth rate (CAGR) of 82% over the past two years, with net profit increasing from $58 million last year to $361 million this year.

How efficient is the operation?

Service costs, a measure of how much a company spends to serve the average user, have been steady at $0.90 since last year, while deposit costs are relatively low at 80% of interbank interest rates.

In the fourth quarter of 2023, net interest income increased by 85% year-on-year, and the net interest margin was 18.3%, close to historical highs.

Gross profit will increase by 87% compared with 2022, and gross profit margin will expand to 47.5%. That drove net income higher, to $361 million in the fourth quarter from $58 million a year earlier.

Start making profit

However, the company has made some gains in operations. In the year ending June 2023, the company’s number of customers increased by 28% to 84 million, and revenue increased by 61% to approximately US$1.9 billion. , and turned losses into profits, improving from a net loss of US$30 million to a net profit of US$225 million.

Expansion of operating business

Expanded to other LatAm countries

It currently has locations in Brazil, Mexico and Colombia. In less than two years since launching operations in Mexico in early 2020, Nubank has become the largest credit card issuer in the country. As of September 30, 2021, Nubank had 760,000 customers, which is significantly higher than Mexico’s existing banks. This catfish, which once rocked the Brazilian banking market, is expected to upend traditional markets in Latin America.

Customer scale

From 2018 to 2020, the number of Nubank customers was 6 million, 20.1 million and 33.3 million respectively, representing year-on-year increases of 98%, 232% and 66% respectively. As of March 2021, the total number of Nubank customers has risen to 48.1 million, a year-on-year increase of 62%; in terms of monthly active users, Nubank’s data in the past three years were 5.1 million, 12.1 million and 21.8 million respectively, with year-on-year growth rates of 84% and 61. % and 66%.

As of September 30, 2021, Nubank had 48.1 million users, accounting for approximately 28% of Brazil’s population aged 15 and over. Among them, about 73% are monthly active users. In Brazil, Mexico and Colombia, Nubank adds an average of more than 2 million net customers every month. On average, Nubank recovers its customer acquisition costs in less than 12 months.

In 2023, the company added 19 million new accounts, bringing the number of accounts to nearly 94 million at the end of the year, including 53% of Brazil’s adult population, using Nubank’s digital bank account services.

What drives the business

One of its key drivers of growth is cross-selling new products to existing customers, thereby increasing average revenue per active customer (ARPAC). As digital trading grows in Brazil, the majority of transactions will flow through Nubank’s channels, driven by new customers and more transactions through its products.

But it’s not just new customers that bring in higher revenue. Nubank has expanded to offer a wide range of financial products beyond bank accounts, such as credit cards and investment instruments, and it also sells and cross-sells new products. User engagement is high at 83%. This results in an increase in average revenue per active customer, which continues to grow year over year as overall revenue grows.

Nubank has shifted from primarily addressing the pain points of lower socioeconomic groups to targeting wealthier segments of the population, with payment volumes on its Ultravioleta credit card targeting high-income earners more than doubling year-over-year in the fourth quarter of 2023.

Famous investors

Private equity or venture capital

Before going public, Nubank received capital injections from well-known private equity funds or venture capital investment institutions such as Sequoia Capital, Redpoint Ventures, DST, Tiger Global Management, and GIC.

Buffett’s Berkshires

In June 2021, Buffett’s Berkshire Hathaway invested US$500 million in Nubank.

Berkshire Hathaway (ticker: BRK.A and BRK.B) initially invested US$500 million in Nubank in June 2021, and then invested US$250 million in the bank when the company went public in December of that year. about. As of June 2023, Berkshire holds about 107 million shares of the company, with a shareholding ratio of about 2%.

Tencent

In October 2018, Tencent (ticker: TCEHY) invested US$180 million in Nubank, becoming one of the shareholders of this unicorn and bringing help to Nubank in areas such as payments, consumer loans, engineering and machine learning. , which is Tencent’s first investment in Latin America’s largest economy.

Competitors

Brazil’s top five banks

Brazil’s banking system is one of the most bureaucratic in the world, with the following five largest banks in the country monopolizing 80% of the local financial services market share:

  • Itáu Unibanco (ticker: ITUB)
  • Banco Santander (ticker: SAN)
  • Banco Bradesco (ticker: BBD)
  • Banco do Brasil (ticker: BDORY)
  • Caixa Econmica

In addition, banks that were previously overtaken by Nubank also have an example. As early as 2019, Itáu Unibanco one of the five largest banks in Brazil, launched the QR code payment platform Iti, whose functions are close to those of domestic users. There is no need to be a bank customer and the threshold is also low. If Itáu Unibanco is willing to take the risk of subverting its own cash cow and bear Iti’s high operating expenses for a long time, it will have a great opportunity to challenge the virtual credit card hegemony established by Nubank.

As of October 2021, more than 110 million Brazilians are using the instant payment platform Pix launched by the Banco Central do Brasil (the Bank of Brazil is its agent), which is also an electronic wallet type.

Large fintech

In recent years, the rapid development of the following Brazilian financial technologies has also challenged the interests of these traditional financial giants to some extent:

  • StoneCo (US: STNE) is a Brazilian payment fintech player.
  • PagSeguro (US: PAGE): Brazil’s payment fintech player.
  • Cielo SA (ticker: CIOXY): Cielo is Brazil’s largest credit and debit card operator. Founded in 1995, it is a partnership between Visa (ticker: V) and Bradesco, Banco do Brasil, Banco Real (now Banco Santander) and a joint venture with the now-defunct Banco Nacional bank.
  • MercadoPago (ticker: MELI), for details, please see my other previous post “Latin America’s e-commerce dominant MercadoLibre“

Smaller new fintech

In addition, a new batch of financial technology companies are emerging. For example, in the Mexican market, new players such as AIbo, Fondeadora, V exi, and Stori Card have emerged. Among them, AIbo has adopted a sinking strategy with a lower threshold than Nubank, claiming that people with no credit history can also enjoy financial services.

Capital market performance

Share price performance

In the year ending in June 2023, the company’s number of customers increased by 28%, revenue increased by 61% annually, and it turned a profit and started making money. Therefore, the company’s stock price rose by 104.67% in the year of 2023.

And the performance over the past year has been impressive, rising more than 150%. However, since the company’s stock price has been falling since the IPO, as of May 2024, the stock price has only returned to the price when the company was originally listed in 2021.

Valuation

As of May 2024, the market value is US$109.14 billion, and the price-to-earnings ratio is 44.81.

The company’s three major goals

Loan doubled

Personal loans will be doubled in 2023 to achieve the first goal. As it attracts more deposits, this paves the way for full expansion of the business, increasing net interest income and loan products, and building long-term relationships with these customers.

Take on large traditional banks

As for the second goal, Nubank initially aims to replace large traditional banks in traditionally underbanked areas. Its low-fee products appeal to the masses, but it has also attracted the attention of a broader market looking for easy-to-use digital financial services, and the company is expanding its reach to more affluent people. In the fourth quarter of 2023, Ultraviolet credit card transaction volume for this audience more than doubled year over year.

Expanding operations in Brazil, Mexico and Colombia

Nu identified three goals heading into 2023: expand lending operations in Brazil, increase participation in Brazil’s high-end market and increase local currency deposits in Mexico and Colombia.

To achieve its third goal, last May it opened a new service for deposit accounts in Mexico, where deposits doubled to more than $1 billion within two months, faster than it achieved that goal in Brazil. three times. The product received regulatory approval in Colombia only last December and was launched in January.

Challenges and risks

Has the potential to become Block or PayPal

If Nubank meets all conditions, the company continues to operate smoothly, and the overall environment in Latin America improves, perhaps Nubank “has a chance (but it may not happen)” to become Latin America’s version of Block (formerly known as Square, ticker: SQ) Or the potential of PayPal (ticker: PYPL ).

Regarding Block and PayPal, the two largest financial technology companies in the world, please see my previous posts:

Challenges

In terms of the number of users it currently has, Nubank has quickly emerged as the world’s largest digital bank. However, with the rapid expansion of its business, problems such as financial losses, network security, and intensified competition between traditional banks and new companies need to be solved. How to ensure the future? Sustained profitability is also the focus of Nubank’s thinking.

Unstable Latin America

Latin America does offer a lot of opportunities, but the region is known for its unstable societies, staggering inflation, alarmingly high unemployment rates, and scary exchange rates. Each of these factors is a major negative factor for business operations, and investors must not be cautious.

Nubank
credit: wiki

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Author: Andy Lin

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