Financial technology company Nu Holdings Ltd. (NU) operates as a digital financial service platform primarily in Brazil, Mexico, and Colombia. The company’s offerings include Nu credit and debit cards, Ultraviolet credit and debit cards, and mobile payment solutions for its NuAccount customers. It is headquartered in Sao Paulo, Brazil.

As of December 31, 2021, Warren Buffett’s holding company Berkshire Hathaway Inc. (BRK.A, BRK.B) has a 2.3% stake in NU, and its shares consist of 0.1% of the holding company’s portfolio. NU is set to allocate 1% of its equity in Bitcoin. Additionally, Bitcoin critic Buffett’s BRK.A made a $1 billion investment in Brazilian fintech.

NU’s stock has declined 61.3% since it went public in an IPO process on December 9, 2021. It has declined 57.4% year-to-date and 43.3% over the past month to close yesterday’s trading session at $4.00.

Here are the factors that could affect NU’s performance in the near term:

Recent IPO

The company went public in a traditional initial public offering (IPO) process, that consisted of an international offering of 289.15 million of its Class A ordinary shares at $9.00 per share. The company also issued a concurrent offering of its Class A ordinary shares in Brazil in the form of Brazilian depositary receipts (BDRs) at R$8.36 per BDR. NU began trading on the New York Stock Exchange on December 9, 2021. The company intended to use the proceeds from the offering for general corporate purposes, acquisitions, and investments.

Stretched Valuations

In terms of its forward Price/Sales, NU is currently trading at 6.07x, 114.8% higher than the industry average of 2.83x. The stock’s forward Price/Book multiple of 4.42 is 304.2% higher than the industry average of 1.09.

Negative Profit Margins

NU’s trailing 12-month net income margin of a negative 19.41% is substantially lower than the industry average of 29.40%. Its trailing 12-month ROE and ROA of a negative 6.76% and 0.83% compare to their respective industry averages of 12.73% and 1.27%.

POWR Ratings Reflect Bleak Prospects

NU’s POWR Ratings reflect this bleak outlook. The stock has an overall rating of D, equating to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

NU has a Value grade of F, which is justified by its lofty valuations.

In the 49-stock Consumer Financial Services industry, it is ranked #44. The industry is rated D.

Click here to see the additional POWR Ratings for NU (Growth, Momentum, Stability, Sentiment, and Quality).

View all the top stocks in the Consumer Financial Services industry here.

Bottom Line

NU’s Bitcoin venture might prove to be beneficial for the company. However, its negative ROE is concerning. And the stock looks overvalued at current prices. Hence, even though Buffett has invested in the stock, I think it is best avoided now.

How Does Nu Holdings Ltd. (NU) Stack Up Against its Peers?

While NU has an overall POWR Rating of D, one might consider looking at its industry peers, EZCORP, Inc. (EZPW) and OneMain Holdings, Inc. (OMF), which have an overall B (Buy) rating.

NU shares were trading at $4.82 per share on Friday afternoon, up $0.82 (+20.50%). Year-to-date, NU has declined -48.61%, versus a -15.16% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...

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