Companies capable of hypergrowth often see their stock prices rise to outrageous levels. However, stocks often remain a bargain compared to their long-term potential. Those willing to accept the high upfront premium can be heavily rewarded if they remain patient.
Even after rising more than 100% since I first pointed out how cheap the stock was, my favorite hyper-growth stock still looks like a bargain compared to its long-term potential. Let’s take a closer look.
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I have been writing about it regularly since the beginning of the year Now Holdings (NYSE: NOW). Warren Buffett bought shares for this holding company when the company went public in 2021, and I noticed that he had lost hundreds of millions of dollars on this investment in the years that followed. At the time of Nu’s initial public offering (IPO), its shares were trading at around $10. A year after the IPO, they were valued at less than $5.
Buffett doesn’t often get it wrong when it comes to companies, so I decided to take a closer look. What I found surprised me. Not only was Nu one of the fastest growing companies I had looked at in years, but its potential growth trajectory was truly impressive.
Let’s go back for a moment and look at what exactly Nu does. Many readers have never heard of the company, and for good reason: Now operates exclusively in Brazil, Mexico and Colombia. So unless you live in one of those countries, or have come across Nu by chance during your stock investment research, you probably know very little about this great company.
At its core, Nu is a fintech company. That means it operates in the financial sector, which is known for its vast addressable markets, but also that it actually operates more like a technology company, capable of growth rates that would be enviable to most financial companies.
When the company was founded in 2016, its main goal was to disrupt the outdated banking sector in Latin America. At the time, the financial sector was dominated by a handful of established banks operating from physical branches. Now it turned the industry on its head by offering its services directly through a smartphone. This approach made it possible to scale quickly, bringing new financial services to customers at the touch of a button while reducing overhead costs, passing on some of those savings to customers.
Nu’s growth is impressive. Over the past ten years, the number of customers has gone from virtually zero to more than 100 million. More than half of all Brazilian adults are now Nu customers. The company’s growth trajectory in Mexico and Colombia is much longer than in Brazil, Nu’s first and oldest market. And with over 650 million residents in more than a dozen other Latin American countries, Nu’s long-term growth is likely just beginning.
The excitement about Nu’s explosive growth caused the market to value the shares at a high premium during the IPO. But a market-wide decline in 2022 caused this premium valuation to collapse. After hitting an all-time low of just $3.31, shares have been on a massive run, recently breaking the $15 mark. Do you think it’s too late to join? Keep reading.
As Nu’s volatile share price has proven, it’s very difficult to bet on a stock’s short-term price movements, even if it’s a high-quality, fast-growing grower like Nu. Whether or not Nu’s share price beats the market again in 2025, this company remains my top pick for growth investors looking for maximum long-term upside potential.
In the past, Nu was mainly valued on the basis of turnover growth. This approach made a lot of sense, as the company remained unprofitable yet consistently achieved annual revenue growth above 100%. However, recently the company became profitable. This inflection point is just beginning, especially at a company like Nu, which should experience major economies of scale with its tech-first business model.
Analysts expect annual earnings per share (EPS) to grow more than 50% per year over the next five years. The current valuation of 50 times earnings – which would otherwise look quite expensive – should fall quickly as earnings per share continue to grow. For example, the forward price-to-earnings ratio is only 37.
As with all growth stories, this story will take some time to play out. But don’t let Nu’s rising stock price fool you: you can still get in on the action if you’re willing to stay patient.
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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.
My Favorite Hypergrowth Stocks to Buy Right Now with $1,000 was originally published by The Motley Fool
