One of Wall Street's biggest winners of the day is Nu Holdings Ltd., a diversified banking company whose shares have climbed 9.5% to a price of $4.99 -- 34.13% below its average analyst target price of $7.58. The average analyst rating for the stock is buy.NU may have outstripped the S&P 500 index by 9.3% so far today, but it has lagged behind the index by 47.7% over the last year, returning -55.9%.
Nu Holdings Ltd. is included in the financial services sector, which includes a wide variety of industries such as credit services, mortgage, banking, and insurance. Owing to this variety and the fast pace of innovation within these industries, investors may struggle to make sense of this sector.
As evidenced by the financial meltdown of 2008, seemingly healthy financial services companies -- from insurers to investment banks -- may see their market value plunge to zero in a matter of months. While the financial crash was likely a once-in-a-generation event, it highlights the volatility that is inherent to the sector. Financial innovation creates opportunities, but also new types of risk that investors and even the companies themselves may not fully understand.
As of the second quarter of 2022, the average Price to Earnings (P/E) ratio for US financial services companies is 12.43, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
Nu holdings ltd. does not release its trailing 12 month P/E ratio since its earnings per share of $-0.07 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for NU of -75.7. Based on the company's positive earnings guidance of $0.07, the stock has a forward P/E ratio of 71.3.
Unlike earnings, gross profits only take into account the company's cost of goods sold (i.e. cost of labor and materials only). The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. In NU's case, the gross profit margins are 100%, which indicates that it potentially benefits from a sustained competitive advantage over its peers, allowing it to maintain highly profitable pricing structures.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Nu holdings ltd.'s P/B ratio indicates that the market value of the company exceeds its book value by a factor of 4, so the company's assets may be overvalued compared to the average P/B ratio of the Financial Services sector, which stands at 1.78 as of the second quarter of 2022.
Since it has a negative P/E ratio, an inflated P/B ratio, excellent profit margins, an analyst consensus of strong upside potential, and weak cash flows, Nu holdings ltd. is likely fairly valued at today's prices. We hope you enjoyed this overview of NU's fundamentals. Before you reach your own decision, be sure to check the numbers for yourself, especially focusing on their trends over the last few years.
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