Carnival fintech: preparing for the IPO of Nubank

Карнавальный финтех: готовимся к IPO Nubank

7 December Brazilian fintech ecosystem Nubank (NYSE: NOT) goes public in the USA. This business has growth prospects, but stocks now look overvalued.

When creating the material, sources were used, inaccessible to users from the Russian Federation. Hopefully, you know, what to do.

What do they make money on

Nubank is a Brazilian digital banking platform. To its users - as private consumers, and to 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 a 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 split into the following segments:

  1. Interest income and income from financial instruments - 57,16%. The company earns, holding clients' money from deposits and card balances and investing them in liquid instruments such as government bonds.
  2. Fees and commissions - 42,84%. Company commission for the use of its solutions by users.

The company is unprofitable: its final margin is approximately −9.33% of its revenue.

Revenue by country:

  1. Brazil - 98,46%.
  2. Mexico - 1,51%.
  3. Colombia - 0,03%.

The company plans the following IPO conditions: share price around 8-9 $ and capitalization in the region of $ 41.5 billion. During the placement, the company plans to receive approximately $ 2.6 billion.

Карнавальный финтех: готовимся к IPO Nubank

Карнавальный финтех: готовимся к IPO Nubank

Number of Nubank customers in millions

2018 6,0
2019 20,1
2020 33,3
2021 48,1


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 you count more impudently and include more related areas in other Latin American countries, also add potential income 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 on paper - and the share of electronic payments will grow steadily. Which means, Nubank will be able to cash in on this transaction volume.

At the same time, now the company has a whole universe of the population of Latin America, which 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., which limits the access of this population to loans, despite the fact that it is quite solvent. Nubank is growing in no small measure due to the, what serves that audience, which ordinary banks bypass.

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Generally, if we somehow summarize the above, Nubank is a fintech ecosystem in an underdeveloped region, and therefore can hope for an increase in operating performance simply due to the low base effect.

Карнавальный финтех: готовимся к IPO Nubank

Informally 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 average in Brazil - 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 news about this will have a positive impact on the business of the latter, and on its quotes.

Карнавальный финтех: готовимся к IPO Nubank

Карнавальный финтех: готовимся к IPO Nubank

Карнавальный финтех: готовимся к IPO Nubank

usual suspects. The company has a bunch of big investors - but one of Nubank's most famous investors is Warren Buffett., whose Berkshire Hathaway has invested as much as $ 500 million in the company. I think, this may be enough to attract ordinary investors to Nubank shares, who will fall for it, that "Buffett blessed the company".

Good day to IPO. The leading underwriters of the company's IPO 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 its shares without problems. I 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 - as in the number of IPOs themselves., and on the amounts collected there. So that, may be, Nubank IPO will be successful.

For your - and our - profit. VC investment in Latin American startups has grown strongly in recent years, in no small part due to the generous investment in Nubank, but there are other projects. All these projects are backed by large funds and investors.. They are all interested in, to make good money on your investments by listing them on the stock exchange in the future.

This makes them interested in the success of Nubank's IPO - after all, by the level of Nubank's success, investors will be able to judge, should I take shares of similar companies from Latin America in the future. So I would expect, that large venture capitalists, financing 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 will also be crowned with success.

Карнавальный финтех: готовимся к IPO Nubank

Карнавальный финтех: готовимся к IPO Nubank

Карнавальный финтех: готовимся к IPO Nubank

Карнавальный финтех: готовимся к IPO Nubank

What can get in the way

There are two classes of stocks - which one you take, and which one will you sell to investors? The company is registered in the Caymans - this is already alarming. Among the problems of the Cayman registration from the point of view of shareholders, the following two points are important::

  1. Nubank is not required to include on its board of directors mostly independent directors.
  2. Nubank should not be satisfied with shareholders voting on certain issues, related to the payment of remuneration to employees in shares.
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But these are all little things. The most alarming aspect of the upcoming IPO is, what will Nubank have 2 class of shares: A and B. Class B shares will have more votes. Generally, 75% of votes in the company belongs to its founder David Velez Osorno. As 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 misunderstanding of investors. Therefore, the price was reduced to 8-9 $ per share.

Even so, the company is prohibitively expensive.: her P / S is 29,64, a P / E she does not have - she is unprofitable. Actually, unprofitableness in itself guarantees the volatility of stocks. But combined with that fact, that the company is worth almost 30 annual proceeds, ideal conditions are created, so that these stocks constantly shake and fever.

Completely incomprehensible, why is Nubank worth more, than other Brazilian fintech PagSeguro Digital, with P / S in the area 10, and there is also profit - unlike Nubank. One can object to this, 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 the dynamics of its profit growth? Sure, it may turn out like this. But history shows, that overvalued unprofitable companies, even over long distances, almost never achieve profitability, what investors are counting on.

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. That being said, I would not have hoped, that Nubank will soon be profitable: money, obtained during the IPO, she is, most likely, will spend on expansion in other Latin American countries.

Also worries me, that the company, working in ever developing countries, claims to capitalize on the level of American fintech. 41,5 billion dollars of expected capitalization of Nubank is too much for a country so volatile, like brazil.

Also, such a price will significantly limit the amount of the premium to the company's price., 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 an IPO. Slightly less than half of the issuers who staged an IPO this year are now trading at a price below the cost of placement. So the risks are very high, that stocks will then fall, - fortunately, there are enough arguments in favor of this point of view.

Карнавальный финтех: готовимся к IPO Nubank

Moderate your ardor. In the PagSeguro review, I already talked about, how in Brazil they want to limit commissions on payments, - if this risk is realized, it will negatively affect Nubank. it, sure, 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.

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Do not forget, Where are you. To paraphrase Kipling, south of the Rio Grande, the bill of rights is invalid. Considering the problems with the structure of the company's ownership, I think, that there are risks of deceiving shareholders.

You also need to understand, that the company operates in the ever-developing 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 bad news from Brazil with a sell-off in Brazilian stocks. Also, the drop in the Brazilian real will reduce the number of dollars in the reporting - and, again, scare away US investors.. And the Brazilian currency is not the most stable in the world - and the deterioration of the economic situation in Brazil does not contribute to its strengthening.

Again, excessive deterioration of the economic situation in Brazil may affect the growth rate of Nubank, since 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 rates of local fintechs and technology companies.

And directly the worsening economic situation in Brazil could negatively affect Nubank's ability to make money.. She receives a huge part of the proceeds from financial transactions - and if a full-scale crisis begins in the Brazilian financial system, then it will negatively affect the finances of Nubank.

Also, the attitude of investors towards Nubank may be negatively affected by a modest result., featured by latin american stocks this year. Most Western investors do not really bother with the study of countries and markets., and often their investment decisions are based on roughly the same premises, as the mass of ordinary retail investors.

The only difference is, that a retail investor often gets information that is important for making investment decisions in a bathhouse, the gym and other places where his acquaintances gather. And a respected investment banker can take a quick look at the report on the situation on the stock exchanges in Latin America., compiled "on the fuck off" by a non-Spanish and Portuguese trainee, and will still make decisions based on, what his country club colleagues think. Therefore, Nubank shares may not skyrocket simply because, what big investors will decide, that “well, here the data from Latin America on the stock exchange is not very, think, we need to postpone the purchase of these shares ".

Карнавальный финтех: готовимся к IPO Nubank

Карнавальный финтех: готовимся к IPO Nubank

Карнавальный финтех: готовимся к IPO Nubank


In my opinion, Nubank is monstrously overrated. I think, that the IPO price should be at least two times lower than the current one. Better yet, at three. The company's weaknesses outweigh the strengths.

But it does not mean, that the IPO will fail. And maybe, shares will continue speculative growth despite all the company's problems. But while Nubank as an investment idea looks too risky even for me.

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