Should You Buy Nu While It's Below $12?

Investors who allocate capital to the financial services space will likely be familiar with industry heavyweights such as JPMorgan Chase, Bank of America, Visa, Mastercard, and Charles Schwab. I'm sure younger and digitally native companies such as Robinhood Markets and SoFi Technologies come to mind as well.

However, you might not know about Nu Holdings (NYSE: NU), a fintech enterprise that's making a splash in Latin America. It has already grown into a sizable business, with a market cap of $55 billion. And with shares currently 31% off their peak and trading for less than $12, it deserves a closer look.

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Winning over customers

Nu shares are volatile, but investors shouldn't let that distract them from the quality of the underlying business, which continues to fire on all cylinders. Growth is the most important variable to focus on.

Nu's revenue rose by 43% in 2024. That kept an impressive streak of monster gains going. The average estimate among Wall Street analysts covering the company is for its sales to rise at a compound annual rate of 32% during the next three years.

The company's digital banking platform, which offers an array of financial services, is resonating strongly with people in Brazil, Mexico, and Colombia, the three markets where Nu currently operates. Its success in finding significant product-market fit is understandable when you consider how many people in those countries are (or were) either unbanked or underbanked. As of Dec. 31, Nu had 114 million customers -- more than twice as many as it had just three years earlier.

It's encouraging to see Nu generating rising profits. Demonstrating the business model's scalability is the fact that the net profit margin went from negative 9.7% in 2021 to 17% in 2024. Robust unit economics helped. Because it does not have the overhead expenses of operating physical bank branches, Nu's bottom line should keep expanding at a healthy clip.

Understand the risks

Bullish arguments don't paint the whole picture about any company. It's important to understand a stock's key risks, and Nu certainly has some.

Any bank that wants to do well must have effective risk management, and on that front, the executive team plays a crucial role. If leadership wants to push for more growth at a faster pace, for instance, it can loosen lending standards -- but this does increase the probability that a larger percentage of borrowers will default. With that in mind, investors should keep an eye on Nu's credit loss allowance expense. It was up 39% in 2024.

Nu's growth rate during the long term will surely come down as it further penetrates its core markets. It already operates in three of the four largest economies in Latin America, and 58% of adults in Brazil are already customers. Once it has picked most of the low-hanging fruit in terms of customer acquisition, it will become difficult for it to maintain its past growth pace.

Being based in Latin America also poses specific risks. Investors shouldn't be surprised by adverse developments such as interest rate changes, inflationary pressures, or geopolitical turmoil.

Dealing with the market's uncertainty

So far, 2025 hasn't been smooth for investors. President Donald Trump's trade wars and tariffs aren't giving the market reasons to be optimistic, at least in the near term. Consequently, investors are increasingly concerned that an economic downturn is looming. Perhaps in that context, owning shares of businesses that are more sensitive to macroeconomic turbulence isn't a good idea.

Nu shareholders are feeling the pain. The stock hit an all-time high in November, but it's now plunged from that peak, and it continues to be volatile.

However, the positive factors about the business should hold more weight. And the shares now trade at a compelling valuation -- Nu's forward price-to-earnings (P/E) ratio of 19.4 is in line with the forward ratio of the broad-market S&P 500 index.

I think this presents investors with an opportunity, even taking into account the risks. If you are a long-term investor who can focus on a company's prospects during the next three to five years, Nu looks like a solid stock to buy below $12.

Should you invest $1,000 in Nu Holdings right now?

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Bank of America is an advertising partner of Motley Fool Money. Charles Schwab is an advertising partner of Motley Fool Money. JPMorgan Chase is an advertising partner of Motley Fool Money. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America, JPMorgan Chase, Mastercard, and Visa. The Motley Fool recommends Charles Schwab and Nu Holdings and recommends the following options: short June 2025 $85 calls on Charles Schwab. The Motley Fool has a disclosure policy.