7 December Brazilian fintech ecosystem Nubank (NYSE: NOT) goes public in the US. This business has growth potential, but stocks now look overpriced.
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What do they earn
Nubank is a Brazilian digital banking platform. To its users - as private consumers, and legal entities - the company provides a bunch of financial services and products: credit cards, mobile payments, savings accounts, loans, insurance.
The main source of information about the company is its registration prospectus.
Considering, how fast is the company's revenue growing, we are looking at data for 9 Months, ended 30 September 2021, - revenue for this period exceeds the entire revenue of the company for 2020. Nubank's revenue is divided into the following segments:
- Interest income and income from financial instruments — 57,16%. The company earns, holding clients' money from deposits and card balances and investing it in liquid instruments such as government bonds.
- Fees and Commissions — 42,84%. Company commissions for the use of its solutions by users.
The company is unprofitable: its bottom line margin is approximately −9.33% of its revenue.
Revenue by country:
- Brazil — 98,46%.
- Mexico - 1,51%.
- Colombia — 0,03%.
The company plans the following IPO conditions: share price around 8-9 $ and capitalization in the region of $ 41.5 billion. The company plans to raise approximately $2.6 billion during the placement..
Number of Nubank customers in millions
| 2018 | 6,0 |
| 2019 | 20,1 |
| 2020 | 33,3 |
| 2021 | 48,1 |
6,0
Arguments in favor of the company
There is much further. The company's platform has 48.1 million users. And there are reasons to believe, that this is not the limit. For example, in Brazil, the company only covers 28% population aged 15 years.
According to the calculations of Nubank itself, the company's revenue is less 1,3% target market of the company. Expected, that this market will grow by 5% per year until 2025, reaching 126 billion. Revenue is $ 1.265 billion for 12 Months, ended 30 September 2021. This includes such products, as a retail loan, insurance in the consumer sector and others, the Brazilian market is taken into account.
If we take it bolder and include more related areas in other countries of Latin America, add potential earnings from third-party settlements on the Nubank platform, then the company's target market will be much more significant - 186 billion now and will grow by 8% per year until 2025.
78% Payments in Latin America are still made on paper - and the share of electronic payments will grow steadily. So,, Nubank will be able to profit from processing this volume of transactions.
At the same time, now the company has a whole universe of the population of Latin America, who does not yet have access to credit. In Brazil, for example, only 27% population older 15 years - against 65,6% in USA. In other Latin American countries, where does Nubank work, performance is even worse: in Mexico 9,5%.
This situation is largely facilitated by the high rates of informal employment in these countries., what limits the access of this population to loans, despite the fact that it is quite solvent. Nubank is growing in no small part because, what serves that audience, which ordinary banks bypass.
All in all, if we somehow summarize the above, Nubank is a fintech ecosystem in an underdeveloped region, and therefore it can expect an increase in operating performance simply because of the low base effect.
Informal working population in Latin America, percentage of total
| Before the pandemic | January 2021 of the year | |
|---|---|---|
| Peru | 67% | 65% |
| Mexico | 56% | 56% |
| Colombia | 48% | 49% |
| Brazil | 41% | 40% |
| Chile | 22% | 21% |
Better, than others. The indicator of non-payments on company cards for 90 days is 3,3% Is less, than the Brazilian average 4,8%. Such metrics, like the quality and age of the audience, Nubank is better too, than competitors from traditional financial institutions. There is clearly high customer satisfaction as well., and high growth potential of their activity on the company's platform.
Ideally, this means, what Nubank can buy, to take full advantage of its benefits.. But in general, these same competitors may well judge, that they will benefit from a partnership with Nubank, - and the news about this will have a positive impact on both the business of the latter, as well as on her quotes.
usual suspects. The company has a bunch of big investors - but one of Nubank's most famous investors is Warren Buffett., whose Berkshire Hathaway invested as much as $500 million in the company. Think, this may be enough to attract ordinary investors to Nubank shares, who fall for it, that "Buffett blessed the company".
Good day to IPO. Leading underwriters of the IPO of the company are large American investment banks Morgan Stanley, Goldman Sachs и Citigroup. They are extremely interested in, so that the IPO is successful and the company places shares without problems. Think, Underwriting banks are already actively promoting participation in this IPO among their clients.
Plus, 2021 was a very productive year in terms of IPOs, both in terms of the number of IPOs themselves., and according to the amounts collected there. So that, may be, Nubank IPO will be successful.
For your - and our - profit. Venture capital investment in Latin American startups has grown strongly in recent years, in no small part due to generous investments in Nubank, but there are other projects. Behind all these projects are large funds and investors.. All of them are interested in, to make good money on your investments by bringing them to the stock exchange in the future.
This makes them interested in the success of the Nubank IPO, because investors will be able to judge the level of success of Nubank, whether to take shares of similar companies from Latin America in the future. Therefore I would expect, that large venture capitalists, funding projects in Latin America, will contribute to the success of Nubank's IPO, just so that in the future their projects to enter the stock exchange also succeed.
What can get in the way
There are two classes of shares - which one will you take, which one will you sell to investors?? The company is registered in the Caymans - this is already alarming. Among the problems of the Cayman residence permit from the point of view of shareholders, the following two points are important::
- Nubank is not required to include mostly independent directors on the company's board of directors.
- Nubank should not hold a shareholder vote on certain issues, associated with the payment of remuneration to employees by shares.
But it's all little things. The most worrying aspect of the upcoming IPO is, what will Nubank have 2 class of shares: A and B. Class B shares will have more votes. All in all, 75% votes in the company belongs to its founder David Velez Osorno. How do you understand, this creates the broadest scope for oppression by the founder of the company of minority shareholders.
Expensive. Initially, the company wanted to offer shares at a higher price of 10-11 $, but, obviously, faced with lack of understanding of investors. Therefore, the price was reduced to 8-9 $ per share.
But even so, the company is prohibitively expensive.: her P / S is 29,64, a P / E she does not have - she is unprofitable. Actually, unprofitability in itself guarantees the volatility of stocks. But combined with the fact, that the company is worth almost 30 annual proceeds, ideal conditions are created, to keep these stocks constantly shaking and feverish.
Completely incomprehensible, why is Nubank worth more, than other Brazilian fintech PagSeguro Digital, which has P / S in the area 10, and there is also profit - unlike Nubank. It can be objected to, that Nubank's revenue growth rate is much higher: for the first 9 months of 2021, Nubank's revenue was approximately 3,2 times more, than for the whole 2018. Well then P / S about 15 would be enough as a credit of confidence for Nubank.
Can investors expect, what “someday later, in the future” Nubank will justify this price by its earnings growth dynamics? Certainly, it might turn out like this. But history shows, that overvalued unprofitable companies, even over long distances, almost never achieve profitability, what investors expect.
Regardless of whether, how will the IPO go, the company's shares can be very volatile afterwards: it is obscenely expensive for all its unprofitableness. However, I would not hope, that Nubank will soon turn a profit: The money, received during the IPO, she, probably, will spend on expansion in other Latin American countries.
Also worries me, that the company, operating in ever-developing countries, claims to be capitalized at the level of American fintech. 41,5 billion dollars of the expected capitalization of Nubank is too much for a country so volatile, like brazil.
Also, such a price will significantly limit the size of the premium to the price of the company., for which, in theory, someone can buy it.
Don't shoot the underwriter. No matter, who conducts the IPO of the company, — important, what follows the IPO. Slightly less than half of this year's IPOs are now trading below the cost of offering. So the risks are very high, that stocks will then fall, There are enough arguments in favor of this point of view..
Moderate your ardor. In the PagSeguro review, I already talked about, how Brazil wants to limit commissions on payments, - if this risk materializes, then it will reflect negatively on Nubank. This, certainly, will not kill her business - but spoil the accounting, to which investors can react extremely dramatically, who will wait, that the company's reporting will consistently set one record after another.
Do not forget, Where are you. To paraphrase Kipling, south of the Rio Grande no bill of rights. Considering problems with the company's ownership structure, I think, that there are risks of deceiving shareholders.
You also need to understand, that the company operates in the ever-growing countries of Latin America. Anything can happen there - and that "anything" usually happens: since the days of Bolivar, these countries have lived from one crisis to another. Therefore, Nubank's business is constantly under attack..
The company will also depend on the economic situation in Brazil and, more broadly, in Latin America, directly and indirectly..
The mood of American investors will also indirectly influence, who will react to all the bad news from Brazil with a sell-off of Brazilian shares. Also, the fall of the Brazilian real will reduce the number of dollars in reporting - and again scare away investors from the United States. And the Brazilian currency is not the most stable in the world - and the deteriorating economic situation in Brazil does not contribute to its strengthening.
Again, Excessive deterioration of the economic situation in Brazil could weigh on Nubank's growth, because consumer activity in the country, driving business of the company, may fall. Here you can not be afraid of a slowdown in growth. As the example of the RF shows, the degradation of the economy as a whole does not greatly spoil the growth rate of local fintechs and technology companies.
And directly, the deteriorating economic situation in Brazil could negatively affect Nubank's ability to make money.. It receives a huge part of the proceeds from financial transactions - and if a full-blown crisis begins in the Brazilian financial system, then this will negatively affect Nubank's finances.
Also, the attitude of investors towards Nubank may be negatively affected by a modest result., shown by Latin American stocks this year. Most Western investors do not bother much with the study of countries and markets, and often their investment decisions are based on roughly the same premises, like the mass of ordinary retail investors.
All the difference is, that the retail investor often draws important information for making investment decisions in the bathhouse, gym and other places of congestion of his acquaintances. And a respected investment banker can briefly look at a report on the situation on the stock exchanges of Latin America, written by a non-Spanish/Portuguese trainee, and will still make decisions based on that, what do his colleagues at the country club think. Therefore, Nubank shares may not take off simply because, what big investors will decide, that “well, here the data from Latin America on the stock exchange is not very, I think, we need to hold off buying these shares.”.
Resume
In my opinion, Nubank is monstrously overrated. I believe, that the IPO price should be at least two times lower than the current. And even better - at three. The disadvantages of the company outweigh its advantages.
But that doesn't mean, that the IPO will fail. And maybe, shares will continue speculative growth despite all the company's problems. But for now, Nubank as an investment idea looks too risky even for me..
