Shares of Nu Are Down -9.3% -- Are They Valued Fairly?

Diversified Banking company Nu is taking Wall Street by surprise today, falling to $4.33 and marking a -9.3% change compared to the S&P 500, which moved -0.8%. NU is -40.7% below its average analyst target price of $7.31, which implies there is more upside for the stock. As such, the average analyst rates it at buy. Over the last year, Nu has underperfomed the S&P 500 by -37.9%, moving -53.7%.

Nu Holdings Ltd. operates as a digital financial services platform and technology company primarily in Brazil, Mexico, and Colombia. The company 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.

Nu 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 -65.7. Based on the company's positive earnings guidance of $0.07, the stock has a forward P/E ratio of 61.9.

The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2022, the financial services sector has an average P/E ratio of 13.34, and the average for the S&P 500 is 15.97.

To understand the company's long term profitability and market position, we can analyze its operating margins, which are the ratio of its net profits to its revenues. Over the last four years, Nu's operating margins have averaged -27.4% and displayed a mean growth rate of -8.5%. These numbers show that the company may not be on the best track.

To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Nu's free cash flow, which was $-2,930,343,000.00 as of its most recent annual report.

Free cash flow represents the amount of money available for reinvestment in the business or for payments to equity investors in the form of a dividend. In NU's case the cash flow outlook is weak. It's average cash flow over the last 4 years has been $-424,117,000.00 and they've been growing at an average rate of 790.5%.

Another valuation metric for analyzing 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 liquidation value of the company, as if it sold all of its assets and paid off all debts). Nu's P/B ratio is 4.3 -- in other words, the market value of the company exceeds its book value by a factor of more than 4, so the company's assets may be overvalued compared to the average P/B ratio of the Financial Services sector, which stands at 1.95 as of the third quarter of 2022.

Nu is likely overvalued at today's prices because it has a negative P/E ratio, an elevated P/B ratio, and an unconvincing cash flow history. The stock has poor growth indicators because of its negative operating margins with high variability, and no published PEG ratio. We hope this preliminary analysis will encourage you to do your own research into NU's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.

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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.