Buffet Discharges a portion of Nu Shares, Assuring Continued Stability
Buffet Discharges a portion of Nu Shares, Assuring Continued Stability
Various assorted financiers have taken notice of the lucrative and rapid growth prospects of fintech whizz kid Nu Holdings (NU -0.42%), in its almost three years of public trading. Progressive financier Cathie Wood at Ark Invest has consistently supported the parent corporation of Nubank since its initial public offering (IPO) in late 2021. Investment legend Warren Buffett's Berkshire Hathaway (BRK.A 0.46%) (BRK.B 0.33%) has also amassed a stake in Nu since 2021.
Friday saw Nu's shares plummet by 7%, following Berkshire Hathaway's announcement of reducing its ownership in the digital, branchless bank that has managed to become an integral part of the daily financial lives of 56% of Brazil's adult populace in less than a decade. An assortment of filings provided details regarding Buffett's moves to either expand, scale back, initiate, or completely divest from positions in the nearly four dozen stocks that Berkshire Hathaway maintains in its publicly traded portfolio. Given Nu's lesser-known and volatile reputation, it came as no surprise to witness it among the largest movers.
It is undeniably not a positive development when an esteemed investor such as Buffett reduces his investment in a stock. There's no point in sugarcoating retreats. However, the situation is not as dire as it may seem. Let's delve deeper.
Considering the Situation Through a Nu-Colored Lens
Berkshire Hathaway's move is noteworthy, marking the first time Buffett's company has decreased its stake in Nu. Since its IPO, Berkshire Hathaway has owned 107.1 million shares of Nu. With the latest adjustment, Berkshire now holds 86.4 million shares, representing a near 20% reduction in its holdings.
Stepping back, Nu has seen a meteoric rise this year, boasting a 69% increase. Look further back, and you'll see the stock has surged by 245% since the beginning of 2021. Despite the 7% decline on Friday, Buffett's Nu stake is 56% more valuable than it was at the beginning of the year and has grown an impressive 197% since 2020.
Berkshire Hathaway trimmed its exposure to more stocks than Nu. In order to allocate funds towards new opportunities, cash is needed. It's also worth noting that Nu, a rapidly expanding provider of financial services, isn't priced cheaply according to standard metrics. Buffett, a value investing icon, is notorious for selling off assets when they become costly.
Embracing Opportunity After a Wild Week
Last week was a tumultuous ride for investors. Nu's shares touched an all-time high on Tuesday, only to fall on Thursday following the company's third-quarter results. The week concluded on a downward trajectory after Friday's decline following Berkshire's stock sale. Despite this week starting on a promising note, it ended with a 13% slide from its Tuesday high.
In terms of performance, the quarter was solid. Revenue for the three-month period ending in September exceeded $2.9 billion, representing a 58% increase on a foreign exchange-neutral basis or a 38% uptick in U.S. dollar terms. Adjusted income soared by 67% to $592 million in U.S. dollars. Overall, the company outperformed expectations on both revenue and income.
However, the report was not without its flaws. The average revenue per active customer contracted compared to the previous quarter. Its net interest margin also took a minor step back on a sequential and year-over-year basis.
There are reasons to remain optimistic, despite these concerns. Many investors are focused on the 20.7 million fewer shares owned by Berkshire Hathaway, yet they overlook the company's 20.7 million additional customers. There are now 109.7 million Nubank accounts across Brazil, Mexico, and Colombia, growing by more than 5 million customers in the third quarter. Active accounts are increasing at an even faster pace, with user engagement continually improving.
Value investors may be put off by a financial services stock that is being valued at 32 times its 2022 earnings and 23 times analysts' forecasts for 2023. However, growth investors can crunch the numbers to discern that Nu might be undervalued, considering its rapid growth rate. Just because Nu is profitable, with impressive margins, is worthy of mention. Expansion is ongoing, with Nu launching operations in two foreign countries just a couple of years ago. Growth requires money, yet Nu's profits continue to grow at a faster rate than its revenues.
The association with Buffett may have introduced some unconventional investors to Nu Holdings. Those who invested in the stock due to Buffett's backing may be grateful for its strong performance over the previous couple of years. However, it's important to remember that Nu's success did not stem solely from Buffett's interest. Buffett has also recently increased his position in Sirius XM Radio, but shares of this satellite radio monopoly have halved in value. If Berkshire Hathaway reduced its stake in Nu due to its success, as an investor, I don't feel like a failure.
Despite Berkshire Hathaway's decision to reduce its stake in Nu Holdings, the fintech company has witnessed significant financial growth. In just over a year, Nu's shares have skyrocketed by 245%, and even after Friday's 7% decline, they are still 56% more valuable than at the beginning of the year. This growth in value represents a notable return on investment for many, including institutional investors like Berkshire Hathaway. For those interested in investing in the finance sector, Nu's strong performance might serve as an example of the potential rewards of investing in fintech companies, even if the investment legend Warren Buffett decides to divest.