Nubank just crossed the $1 billion net income milestone, but is the market pricing in too much of a growth slowdown? We review the Q2 numbers, look at ARPAC expansion, analyze their recent full banking license launch in Mexico, and build out a DCF model to find the stock’s intrinsic value.

Transcript

Welcome back to another Compounding Alpha podcast. I’m your host, Nick. So in today’s episode, we’re going to be going over Maitland NewBank’s Q2 earnings report from last Thursday. I did a deep dive on them last Tuesday now that that came out. Then last weekend, I had a piece comparing NewBank to PAYGO.

So I will link both of those in the description of the podcast if you guys haven’t checked those out already. So if you want a more in-depth look at the entire new bank business, that will be the place to find it. We’re going to go over the Q2 earnings, kind of go over their slide deck as well,

and then we’ll kind of look through the valuation, how they’re looking. They’re up, I think about, you know, 10 or 15% or so since they’re, Earnings reports, obviously the market had a decent reaction to it there. Yeah, I can see the pop there. But we’ll get right into it. It’s really a solid report here from NewBank.

So right off the top, we’re highlighting customer growth. So approximately 4 million new customers, 139 million globally now, 118 million in Brazil, and Really, the market’s looking for the growth story here. In Mexico, we reached $15.8 million and $16 million as of July. And in Colombia, we’re past 5 million customers now. The other really key area here,

so ARPAC, average revenue per active customer, reached approximately $17 in Q2. So that’s really good, and we’ll kind of Touch on that. Let’s go over here to the slide deck really quick. So we got the average revenue metric right here. So we can just see that climbing steadily over the last few earnings reports. And that’s absolutely key.

And we kind of touched on that a little bit in the business breakdown, right? Well, that’s really a metric where we want to see continuing to make progress on. And it seems like absolutely we’re Making a lot of progress on up to $17 per active customer.

And I think there’s a lot of, you know, a lot of room to continue to grow there. Management talked about that in the conference call, on the Q2 call, where a lot of, you know, they see continue to climb in this. Traditional banks are closer to $40 to $50, I believe, per active customer. And, you know,

management didn’t seem to think they were going to get Quite that high, but certainly, you know, closer to the $30 over the long term, which I think is very bullish for, you know, is really bullish. Even if you start to see, you know, at a certain point, you’re going to start to see a slowdown, I think,

in customer growth, especially with, you know, Brazil being, you know, I think there’s a lot of untapped, you know, exactly right there’s a lot of untapped potential in Brazil, but it’s not exactly with, Customer growth, I don’t think. I think it’s more so from growing the active revenue per customer, where they’re either, you know, becoming a more,

having more money, or they’re using more products from NuPink, which I think is going to be the main driver of that over time. So we’ll get back to that. Let’s get back to the earnings call here. Obviously, we’d really like to see that That number up from 13 to 17 is really good.

So again, the efficiency ratio here too, we’re seeing that actually climb from Q1. That’s kind of steadily gone down, which you would expect, but we’re seeing kind of a, you know, a baseline here. You’re in around the 20% at Cina, which is nice. And that’s a really healthy efficiency ratio for them.

So we’ll get into the overall revenue here. Up 39% year over year to $5.9 billion. And net interest income reached $3.7 billion, up 9% quarter over quarter. So really, really solid there. Annualized, you’re looking at 36%. So really solid. Gross profit reached $2.4 billion, up 43%.

So you’re seeing, you know, margin expansion there too, which is really nice. The balance sheet looking great as per usual. So let’s see if there’s anything else we can really, anything jumping out at us here. So, you know, the 3% growth in customer rate, it is nice to see. Let’s

see here, you know, in the efficiency ratio, Very nice. The risk-adjusted net interest margins are up almost 3%, about 3%. Efficiency metrics are already doing incredible and continuing to rise. Let’s get into the slide deck here. So we kind of got this little formula that management is laying out for us here, right? So we got

a rapidly growing customer base times increasing revenue per customer equals revenue at scale minus a low cost operating platform equals substantial earning power. So that’s what we kind of have laid out here in this chart. So we have growing customer base, the revenue per active customer, gross revenue, efficiency ratio, and net income.

So really, we can see kind of what management’s trying to execute on. I think, you know, really the customer growth is going to probably come from Mexico, Colombia, and then potentially the U.S. expansion as well. The revenue per active customer, I think that we’d really like to see continue to rise across all regions.

And I think, you know, we’re seeing that absolutely, you know, skyrocketing, right? We went from eight to nine to 11 to 13, and now we’re jumping all the way to 17 here. Um, gross revenue, you know, continuing to, um, absolutely skyrocket as well. And the same thing here with net income.

So obviously management is, you know, executing on all these pillars, I think very well. Um, so, you know, Mexico or Brazil, sorry, um, is still a very big market. I think the higher income market is, um, you know, it was a big market for them as, as well as the small,

uh, You know, the small and mid-sized business market or enterprise market. So this is really where I’m kind of interested here. So Mexico expansion, already the largest digital bank in Mexico, 16 million customers and a full bank launch. I think it was not that long ago, actually, yeah, 41 days ago, authorization of Launches a full bank.

So that unlocked payroll, direct deposit, expanded credit, higher deposit insurance, and new customer segments. So really, if they didn’t receive that, you know, that was going to be a big hindrance. It was going to be a cap on how much they were going to be able to grow, right?

You really need to be able to have, you know, you want to be the primary account holder. You want to be where the deposits are coming in, right? So the impact in Mexico... 35% had no bank account before Nubank. So really, I think you can see them execute the same strategy that was executed in Brazil,

in Mexico, right? Where there’s a huge unbanked population in Mexico. You know, I believe Mexico is a bit more, you know, is a bit wealthy per citizen than Brazil. So that might be You know, a bit of a tailwind for them as well. So that’s absolutely, um, well, let’s see.

And then even, you know, even more 52% didn’t have a credit card before new bank. So I think that’s, you know, obviously with the purple card, that’s going to be a big, you know, we’d like to see that number drop drastically. Right.

And it’d be great to see them being the, uh, the number one credit card issuer there in Mexico. Um, So we kind of get a little bit of a comparison over here, right, between Mexico and Brazil. So really kind of exactly kind of lined up with where you saw Brazil in 2020. So if you saw, you know,

if you do see management execute upon, you know, the Brazil strategy in Mexico, you’re going to be looking at a very big Mexico business here in a few years, I think. So let’s kind of jump back. Let’s kind of look into the valuation and where the market’s putting it at. You know, I think that could be,

that’s really where the kind of opportunity lies, right, with this stock is the markets kind of, we can kind of get, scroll down here and see what estimates are looking at. So we’re looking at, you know, 30% year-over-year growth estimated, 22% revenue. So you’re looking at quite the deceleration from analysts, you know, where we’re growing 50% year-over-year.

You’re going to, you know, you’re obviously going to see the deceleration, but we’ve seen no, you know, grow, you know, 40% this year. So we’re not seeing this quarter at least, sorry. So you’re not seeing a lot of, you’re not seeing the signs of it, at least as much as analysts are expecting.

So, I mean, I think a portion of that, you know, potential slowdown is priced into the stock. And I think your upside really is potentially this, you know, their expansion into Mexico, Columbia, and then the U.S., it really will be the kicker. If those go well,

you might not see the slowdown nearly to the proportions that are kind of being expected here, right? So, I mean, we’re growing 40%. We were right about 41% year-over-year. 39% year-over-year, yeah. So, I mean, right around 40%. And they’re coming in for next year at 29% or 22% revenue and 30% EPS.

So, I mean, I think really there’s a lot of deceleration priced into the stocks. We can look at the DCF we have here. You know, I’m coming in at 25%, right, for EPS growth. And I believe, you know, what was EPS coming out of it? 29%, right? So that’s even below...

Where Wall Street’s pricing the stock or pricing it. And I kind of have it stabilizing there a bit. Kind of slow down. And we could go a bit lower here if we want, if we expect some kind of headwinds a bit from the US expansion. They’re gonna have a bit of a capital outlay for that.

And then we’ll get back to growth and then slowing down a bit. So this is a really kind of, You know, deceleration in the growth model right here, and you’re still getting, you know, at 20 times, right? So it might be a bit that is kind of holding their current multiple. We’re at 19 times, I guess.

So a little bit of a bump up, but not really. So we’ll go to like 15 times and you’re at 11% return annualized rate. But, you know, this is a pretty, you know, by year five, you’re at 10% growth rate. You know, obviously you have the currency. The currency risk whenever you’re, you know,

investing in a company primarily dealing with, you know, South American earnings here. But, you know, I think there’s really a lot of pessimism in this stock for what the growth is projected. I mean, if we, let’s say we grow 35%, you know, let’s say this is, you know,

we could still price in a bit of a slowdown for year one, but let’s, or for, U.S. expansion. So let’s say, you know, we do that and then we’re, you know, we’re getting back to like 26 and then we’ll go to 20. Now we’ll kind of end up, let’s go to like 15.

You know what I’ve kind of do with this is like more of a bullish case scenario. I think a lot of people are going to say that, you know, that they could do even better than that, which I wouldn’t disagree with. And you’re looking at about, you know, you’re getting about 17% a year at 15 times, right?

So, I mean, I think in this scenario too, 15 times is a really conservative multiple. So if you’re putting them at 20 times, kind of holding their current multiple, which I think is pretty fair. If not, you know, I mean, I think they can even come in 25 times, to be honest with you.

I mean, growing 15%, you know, you’re looking at almost 30% a year. If they get a 25 times multiple, Um, in this scenario, right? And they’re growing, you know, this is a pretty, you know, this is a great, you know, really good growth scenario. This would be great for the company, right? Obviously they would have had, um,

at least Mexico, I think would have worked out really well for them under this scenario. You know, I think the big, you know, kind of like where I would be more will kind of be 20 times. It’s kind of make this look a little nicer.

I’m going to have to edit this for you guys too, for the, um, So when you guys download this, it already updates. But, you know, we’re looking really good, right? I think this is, you know, I think your return profile on this stock is looking pretty good, right?

You know, and I think in a lot of my bull cases, I’m usually rather conservative, right? I’m not always putting out, you know, I don’t think they’re going to grow 150% a year. Just because they, you know, they’re growing 39% right now and they’re expanding into a new market or something, right? I don’t exactly see that coming.

So, you know, it’s like, it could, you know, I certainly can see, you know, I think I have seen a lot of DCS that look even more, or I could imagine some that look even more bullish than this. So I think, you know, your return profile looks very nice here.

So this is one I’m certainly looking at here. You know, obviously you’re looking very nice a few months ago too when they’re at, you know, down around $12 a share, right? But this is one that continue, I think continues to have, you know, they have a huge runway of growth, right?

And I think that will allow them to command a 20 times multiple at the end of this five years, right? You might say, you might look at, I mean, I don’t know how great of a comparison there. You might look at like a traditional Brazilian bank like E2. Maybe that’s not their ticker. I thought it was.

Yeah, here we go. Well, maybe not. All right. I’m not sure. But, you know, and they’re, You know, I think they look there at like 10 times earnings, right? So you might say, you know, and they’re also, they don’t really have the growth, but you might say long-term, NewBank’s going to be at like 10 to 15.

I think you’re going to get a bit of a premium over the traditional banks there. So maybe like 12, you know, 13, 14, 15 times earnings as a mature company for NewBank. But I think at the end of five years, you’re still going to be, you know, I don’t think new banks can be entirely mature. You know,

I think they’re still going to be growing above market, certainly above market rates and above the traditional South American banks. So I think the 20 times is fair. And I also think that, you know, I don’t think we’re going to, you know, this isn’t the end of the expansion for, you know, into new countries.

I don’t think with, you know, I think the U.S. is probably going to be the most exciting, right? But, you know, I think you’ll continue to see new bank expand. I think management has touched on that. You know, I don’t know how many, you know,

it’s hard to say how many countries across the globe they’re going to expand into, right? But, I mean, being a primarily digital bank, right, I don’t see any reason why new bank can’t continue to expand into You know, different demographs across the world that are really underbanked, right?

And really see new bank become a global, you know, kind of financial powerhouse, right? You know, that might sort of hinder their, you know, that might kind of limit, you know, if they do kind of, you know, if they expanded like Africa or Asia or something, right? They might not have the quite,

quite have the word of mouth marketing that they’ve had in South America. But, you know, I think that, you know, maybe, maybe not, right? They’ve done a lot of marketing. You know, they’re sponsoring an F1 team. They do a lot of things, right? So, or they, or at least have a sponsor with an F1 team.

So, I mean, they do a lot of, I think they would have more word of mouth than someone give them credit for entirely across the globe. And they’ve had a lot of success in that. So, I think that, you know, is also an interesting growth factor when you get past the, You know,

year four, five, six here in this DCF, where are they going to be expanding, right? Like you get, you know, sort of in this timeframe, right, where you’re looking at like 20, 28, 29, 2030, right, 2031, where, you know, where are they expanding into, right? Are we at that point, we just seeing,

or is the customer growth flatlining, or we’re just seeing the revenue per active customer growth? Is that where are the growths coming from? Or, you know, and I think that you’ll see a lot of active customer growth at that point, but, you know, revenue per customer growth at that point. But what, you know,

will be interesting and I think would really continue to drive the stock really substantially higher would be expansion into new markets. And that might in and of itself hinder the ARPAC growth, right? If you see them expanding into, you know, more countries, you know, less developed countries, you know, instead of them going for Europe, you know,

they’re going for underbanked nations, you know, they’re not going to be as prosperous. And I think, you know, the U.S. will be an interesting one for how that plays out for them. Yeah, so that’ll be... I think I’ll kind of wrap it up for the video. I plan, I’ll probably do another, I’ll probably go over,

probably do a NewBank breakdown, or a NewBank bowl case breakdown for a Saturday article in the next month or so. I have a few of those already planned out, so this week’s gonna be, this week’s gonna be a really interesting, kind of a special article this week,

gonna be a business breakdown, but it’ll be a collaboration with M&A Hunter. So check that out and definitely check out his channel and subscribe to that if you’re interested. It’s certainly a bit different. I don’t really do any M&A activity here, right? So I think you guys will probably be interested in that stuff.

It’ll be a different perspective on his channel from what I’m usually offering. So you definitely check his channel out. But after that, I’ve been planning a Netflix bowl case breakdown For a Saturday article for a while now, so I want to get that out probably the week after. And then we’ll see from there.

I have a couple of different months kind of planned. I know I was just talking about the new bank one that might be pushed out a bit further because I have planted one on the dollar and kind of gold and silver, which I have actually largely finished now,

but it might be a little bit before that gets out. You know, because I got the Netflix one, too. And then I’m also thinking, you know, a Micron or like a memory bowl case article, I think, is one that is coming soon, too. You know, especially where I’ve done a Micron breakdown on the channel,

I kind of want to touch, you know, get back and touch base on that one again, especially where I thought, you know, you know, where memory is sort of, you know, a hot area right now. And I think that, you know, Whether it’s a bit off its highs, and it certainly,

you know, I actually was a bit more bullish on it than I expected it to be. So I would like to get back to, you know, and kind of go over a real, you know, a full bull case of where, you know, what the bulls are really looking at there. So that would be an interesting one too.

But yeah, that’ll kind of wrap up the video. I’ll link the new bank stuff in the description if you guys are interested. And yeah, be sure to subscribe to the channel. Thank you. See you next time.

In episode 5 of Talkin’ Stocks, we break down the numbers to see what went wrong. We cover the sudden CEO transition from Thomas Hogan to Shiven Ramji, analyze the downgraded full-year ARR and revenue guidance, and look at the company’s climbing R&D expenses. Most importantly, we run through what I missed, and a full Intrinsic Value DCF projection to see if the stock is actually undervalued at these levels. We also discuss the escalating “cat and mouse” security game with Apple and Android, the threat of AI disruption, and the potential for a Private Equity buyout.

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