Two investors who couldn’t be more opposite are Cathie Wood and Warren Buffett. Wood is the CEO and chief investment officer of Ark Invest, a company focused on investing in emerging themes such as artificial intelligence (AI) or genomics. In contrast, Buffett has spent most of his tenure at Berkshire Hathaway owning blue chip stocks as opposed to risky, volatile opportunities in growth sectors.
But despite their different philosophies, Wood and Buffett do have some overlap between their respective portfolios. One company that Ark and Berkshire both own is called Now Holdings (NYSE: NOW). Nu is a fintech player that focuses specifically on Latin and South America.
Let’s look at why Nu looks particularly attractive from a valuation perspective right now and argue why 2025 could be a breakout year for this under-the-radar commercial opportunity.
Now is a digital financial services platform that offers its users an inclusive suite of products ranging from checking and savings accounts, investing, loans and more. For much of its history, Nu focused on markets such as Brazil, Colombia and Mexico.
However, in December the company announced that it was participating in an investment round for digital banking platform Tyme Group, which has 15 million customers in South Africa and the Philippines.
At the end of the third quarter (ending September 30), Nu had 110 million members on its platform, representing 23% year-over-year growth. Additionally, the company’s average revenue per user (ARPU) increased incrementally to $11 per member.
By making its customers more profitable over time, Nu has been able to increase its margins and increase profitability. During the third quarter, Nu’s gross margin increased 300 basis points and net income rose 83% year over year to $553 million.
According to the chart below, Nu is right in the middle of this peer set of other international fintech operations based on price-to-sales (P/S) ratio.
While this might imply that Nu is attractively valued relative to this cohort, it’s the underlying trend in the company’s P/S that stands out to me. Nu’s price-to-earnings ratio has fallen steadily in recent months. I think a big reason for this has to do with the macroeconomic conditions across Latin America, especially in Brazil.
While such concerns are valid, I don’t really see this dynamic as a reason to sell the stock.
There is one stock that has had a tough time in recent years SoFi. SoFi is very similar to Nu in that it offers many of the same basic financial services, all through the convenience of a mobile app.
Although SoFi has a number of different products, the company’s largest source of revenue comes from lending. As the US has faced abnormally high levels of inflation in recent years, the Federal Reserve has resorted to a number of aggressive shifts in monetary policy, causing borrowing costs to rise eleven times between 2022 and 2023. These moves had a significant impact on SoFi’s lending business, and for an extended period of time, investors fled the stock.
However, the economic picture began to steadily improve, and in the final months of last year the Fed began aggressively reducing interest rates. Unsurprisingly, SoFi witnessed a rapid recovery in lending activity, and enthusiasm around the stock began to build. Since the first rate cut in mid-September, SoFi shares have risen more than 80%.
Concerns about inflation and the growth of SoFi’s business reflect a parallel concern with Nu’s currently, given the company’s exposure and vulnerability to a challenging economic environment in Brazil. But that said, investors need to zoom out and remember that long-term economic conditions will eventually begin to change and improve.
For me, the concerns about Nu’s short-term growth are justified. But the long-term picture still looks incredibly robust – underlined by the company’s growing user base, cross-selling opportunities, rising profits and economic expansion.
I see Nu following a similar trajectory to SoFi and think the stock is a buy for investors with a long-term mindset.
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Adam Spatacco has positions in SoFi Technologies. The Motley Fool holds positions in and recommends Adyen, Berkshire Hathaway, and StoneCo. The Motley Fool recommends Nu Holdings and PagSeguro Digital. The Motley Fool has a disclosure policy.
1 Cathie Wood and Warren Buffett Stocks That Could Go Parabolic in 2025 was originally published by The Motley Fool
