How Do Value-Focused Investors See Nu Shares?

Nu was one of the market's biggest losers today, losing -1.2% of its value and underperforming the S&P500 and Dow Industrial composite indices by -1.6% and -1.7% respectively. The large-cap Financial Services company ended the day at $5.06, but is still well above its 52 week low of $3.26 and is 31.64% below its average target price of $7.4. Over the last 12 months, Nu is down -51.6%, and has underperformed the S&P 500 by 35.2%. The stock has an average analyst rating of buy.

Nu does not release its trailing 12 month price to earnings (P/E) ratio because its earnings per share of $-0.07 are negative over the last year. Since P/E ratios are the stock's price divided by its earnings per share, a negative Eps number will result in a negative P/E ratio. This doesn't tell us much besides the fact that the company is not currently profitable.

Based on Nu's positive earnings guidance of $0.08, its stock has a forward P/E ratio of 63.2. Earnings refer to the net income of the company from its sales operations, and the P/E ratio tells us how much investors are willing to pay for each dollar of these earnings. In comparison, the Financial Services sector has historically had an average P/E ratio of 13.34.

Another metric for valuing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present value of the company if it sold all its tangible assets and paid off all debts today. Nu's P/B ratio of 5.0 indicates that the market may be overvaluing the company when compared to the average P/B ratio of the Financial Services sector, which is 1.95.

Much about the past and future prospects of the business are revealed by its profit margins. Since financial companies usually have no or little cost of goods sold, the profitability of the business is best viewed through the lens of operating margins, which take into account overhead. In Nu's case, its annual reports reveal the following operating margins information:

  • 2021 operating margins: -20.0 %
  • 2020 operating margins: -28.4 %
  • 2019 operating margins: -39.5 %
  • 2018 operating margins: -21.6 %
  • Average operating margins: -27.4 %
  • Average operating margins growth rate: -8.5 %
  • Coefficient of variability (lower numbers indicate less volatility): 32.4 %

Since the Nu's average operating margin is negative,, we can see that its business model is facing challenges. While this is normal with newer businesses, an established company cannot sustain shareholder value for long unless it is fundamentally profitable.

To get a better idea of Nu's finances, we will now look at its cash flows. Often touted as a general yardstick for a company's financial health, cash flows represent the sum of inflows and outflows of cash from all sources, including capital expenses:

  • 2021 free cash flow: $-2,930,343,000.00
  • 2020 free cash flow: $971,436,000.00
  • 2019 free cash flow: $273,760,000.00
  • 2018 free cash flow: $-11,321,000.00
  • Average free cash flow: $-2,930,343,000.00
  • Average free cash flow growth rate: 790.5 %
  • Coefficient of variability (lower numbers indicating more stability): 405.8%

Free cash flow represents the money that Nu can use to either reinvest in the business or to reward its investors in the form of a dividend. Since the company's most recent cash flows are negative, it comes as no surprise that investors do not get a dividend.

Nu does not meet the traditional definition of a fairly valued company. Unless the company has strong qualitative factors in its favor, most value investors will probably prefer to avoid this stock. Subscribe to our free daily newsletter today to receive more fundamental focused equity reporting!

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.