Stock market observers would be hard-pressed to find two major investors more different than Warren Buffett and Cathie Wood. Buffett’s careful, value-driven approach to investing has allowed his Berkshire Hathaway conglomerate to become the first $1 trillion company outside of the tech sector. Wood’s ARK funds, meanwhile, focus on extremely high-growth tech companies that often have yet to turn a profit.
Despite their radically different approaches to investing, Buffett and Wood have both taken on small positions in Nu Holdings (NYSE:NU). This Brazilian financial services company has disrupted Latin American banking by providing banking and credit services to customers in Brazil’s emerging market economy.
Why have Wood and Buffett both come to agree on NU, and does the stock still present a good opportunity for investors today?
Key Points
- Warren Buffett values Nu Holdings for its strong competitive position, large growth runway in underbanked markets, and improving profitability.
- Cathie Wood views Nu Holdings as a disruptive fintech innovator poised to reshape traditional banking in Latin America.
- Both Buffett and Wood see opportunity in Nu Holdings’ ability to expand across multiple countries and deliver sustained earnings growth.
NU From the Buffett Perspective
As a value investor, Warren Buffett focuses on finding strong businesses with long-term competitive advantages trading at discounts to their intrinsic value. With these factors in mind, it’s not too hard to see why Buffett has become interested in Nu Holdings.
Firstly, Nu has a substantial competitive moat in its home market. As of Q3, the company counted 110 million customers globally. Nu is also the largest credit institution in Brazil, a country that in 2021 still had around 34 million unbanked adult citizens. This gives Nu an incredible runway for ongoing growth in Brazil, as well as a strong model for reaching customers in other Latin American countries where access to traditional banking remains limited.
Buffett also tends to consider the overall quality of a business in terms of its ability to generate stable, consistent earnings and cash flows. Here, Nu once again has many of the characteristics Buffett looks for. In the 12 months ending in Q3, the company generated $1.78 billion in net income and posted a net margin of 16.3%. Crucially, net margin has been steadily increasing since late 2022.
Net income has been increasing rapidly as Nu has moved to capitalize on its opportunities in Latin American financial services. In Q3, Nu also reported a 30% return on equity, yet another metric that Buffett and his late partner Charlie Munger have been known to prioritize when selecting stocks.
There’s also NU’s valuation to consider. While NU shares may look a bit high at first given their 28.6x multiple to forward earnings and 5.2x multiple to sales, these numbers don’t account for the company’s long-term future growth potential.
NU shares currently trade at 0.6x expected earnings growth, likely putting them in undervalued territory. Buffett’s stake is even more attractively priced, as his cost basis averaged $9.82 compared to the stock’s current price of almost $12.
NU From the Wood Perspective
Unlike Warren Buffett, Cathie Wood tends to place bets on technological innovations that, in her mind, have the potential to disrupt existing industries and create outsized value. Nu’s focus on mobile banking in markets that don’t have the kind of banking infrastructure the United States does falls into this category, and that may have been part of what attracted Wood to NU in the first place.
As a high-growth investor, Cathie Wood has likely also been quite satisfied with the rates of revenue and earnings growth Nu Holdings has been able to produce. Q3’s revenue growth of 37.7% year-over-year was the lowest in the company’s public history. Net income growth has slowed in a similar way, but it still rose by more than 80% in Q3 compared to the year-ago quarter.
Although Wood has received plenty of criticism for her valuation methods, her approach has typically been to buy companies that forego immediate high earnings in order to invest in growth and innovation. For much of its history, Nu Holdings did exactly that, preferring to expand rather than prioritizing GAAP earnings. Luckily for more traditional investors like Buffett, the strategy paid off and has enabled NU to become a fast-growing company that is still attractively profitable.
Unlike Buffett, though, Wood seems less inclined to stick with NU as a long-term holding. Wood first bought Nu Holdings in 2021 at an initial price very similar to Buffett’s average. Where Buffett bought a block of over 100 million shares and has sold less than 20% of his stake since, though, Wood has been much more active in buying and selling shares of the bank. From late 2022 to late 2023, she was consistently selling off parts of her position as NU’s share prices struggled.
Why Are Cathie Wood and Warren Buffett Buying Nu?
Nu Holdings is obviously a rare company that combines the excellent financial footing and structural competitive advantages Warren Buffett favors with the high growth rates prioritized by Cathie Wood. Both of these investors, however, first bought the stock multiple years ago. For investors today, it’s worth asking the question of whether NU is still an attractive investment.
As noted above, Nu’s valuation looks fairly reasonable when expected earnings growth is taken into account. This view also seems to prevail among analysts, who project the stock to rise nearly 30% to a median price target of $15.50 over the coming 12 months. In 2025, the S&P 500 is expected to return to a more normal historical return rate of around 10 percent, meaning that Nu Holdings could triple the returns of the market if it performs in line with analyst expectations.
Strong earnings growth could also continue well into the future. The company is quickly expanding beyond its home market in Brazil, now serving many customers in Mexico and Columbia. If Nu can replicate its Brazilian success in other nations while continuing to add value to its existing customer base, there could be many good years ahead for the company.
Right now, NU holdings could be a solid stock for long-term investors to buy and hold. While there are never guarantees in the stock market, Nu has already gotten many things right and seems to have room for prolonged growth in front of it. For investors who are willing to buy and hold as the company grows, Nu may prove to be a strong multi-year compounding stock.