Nu Holdings Shares Decline After Downgrade Amid Valuation Concerns
On Monday, shares of Nu Holdings, known as Nubank, one of the world’s largest digital financial service platforms, fell by over 5%. This drop positioned the company among the worst performers among publicly traded firms in the U.S. with valuations exceeding $50 billion. Nubank serves a strong customer base of 110 million in Brazil, Mexico, and Colombia.
Citi downgraded Nubank (NYSE: NU) from Neutral to Sell and lowered its price target from $14.60 to $11.00. This downgrade reflects concerns about the company’s high valuation levels and the slowdown in its Brazil operations, a significant growth engine. While Citi acknowledges Nubank's impressive capacity for rapid expansion and revenue growth in Brazil, it suggests a more cautious approach due to current market conditions.
A Citi analyst noted that Nubank’s stock price has gained 50% year-to-date, trading at a price-to-earnings (P/E) ratio of 24.2 and a price-to-book (P/B) ratio of 6.2. These valuations are viewed as high, especially in the context of the bank's operational slowdown in Brazil. The bank's performance leading up to the third quarter of 2024 indicates a slowdown in net interest income/net interest margin (NII/NIM), prompting the firm to suggest profit realization at this point.
The third quarter of 2024 has been highlighted as a potential turning point for Nubank, with several factors contributing to a more challenging growth outlook. These include a slight decrease in average revenue per account (ARPAC), higher funding costs in Brazil and Mexico, and a sequential decline in NII, particularly in the credit card segment. These challenges have resulted in a contraction in the reported net interest margin (NIM) and a decline in risk-adjusted NIM, causing pre-tax earnings to remain flat after several quarters of growth.
Citi also expressed concerns that alternative revenue sources such as salary loans in Brazil, Mexico, and Colombia might take longer to offset the slowdown in credit card and personal loan segments in Brazil. As Nubank adjusts its strategy in response to these market dynamics, the firm’s outlook reflects a more cautious stance regarding the stock's future performance.