Nu Holdings Ltd.’s NU shares tanked 18.9% on Friday after discouraging fourth-quarter results. While investors expressed concerns about the extent of the pullback, should it be viewed as an overreaction and a possible buying opportunity? Let’s delve into it – 

Why NU Stock Plunged?

NU’s fourth-quarter earnings of $0.12 per share aligned with the average Wall Street projection. However, revenues of $2.99 billion fell short of the average analyst estimate of $3.17 billion. NU stock plummeted due to the sales miss. 

But there are more concerning signs. On a sequential basis, the net interest margin (NIM) decreased by 70 basis points (bps) in the fourth quarter due to FX volatility and increased funding expenses in Columbia and Mexico. NIM may have increased 57% year over year (YoY), but it’s still short of the YoY growth of 63%, 77% and 93% in the past three quarters, respectively.

The NU Stock Also Has Positive Aspects 

Although NU’s NIM decreased significantly, its efficiency ratio reached 29.9%, up 150 bps sequentially and over 610 bps from last year. This is unprecedented for a bank and showcases the operational benefits of its fully digital business model.

NU’s revenues increased by 58% YoY to $11.51 billion last year on an FX-neutral basis, showing strong growth. Revenues improved on an increase in customers. NU’s customer base reached 114.2 million globally by the end of Dec. 31, 2024, up 22% YoY.

NU is now Brazil's third-largest financial institution, while its customer base exceeded 10 million in Mexico and reached 2.5 million in Columbia. This expansion in customer base reassured NU’s dominance in the fast-growing digital financial services market.  

Additionally, NU’s 15-90 NPL ratio fell 30 bps from the last quarter to 4.1% in the fourth quarter, showing lower-risk customers and more secured lending.

How to Trade NU Stock Now

Despite NU’s current share price drop, improved efficiency, Latin America expansion, and favorable loan environment indicate future growth. Anyhow, NU shows robust profitability, with a return on equity (ROE) of 30.4%, surpassing the Banks - Foreign industry average of 3.6%. So, those who have invested should maintain their holdings in NU stock for lasting gains. 

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New investors who believe in NU’s long-term growth should take advantage of the dip. Essentially, they will be buying shares at a discounted price and can enjoy greater gains. However, risk-averse investors may adopt a wait-and-watch approach given that the Brazilian currency is weakening against the U.S. dollar and impacting the financial statement translation negatively.

NU has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

 

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This article originally published on Zacks Investment Research (zacks.com).

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