On Monday, Nu Holdings (NYSE:NU), known as Nubank and recognized as one of the world's largest digital financial services platforms, saw its shares drop by over 5%. This decline marked the company as the worst performer among US-listed firms with a valuation exceeding $50 billion. Nubank serves a robust customer base of 110 million across Brazil, Mexico, and Colombia.
Citi has downgraded Nubank (NYSE:NU) from Neutral to Sell, adjusting the price target to $11.00 from the previous $14.60. The downgrade reflects concerns over the company's high valuation levels and a deceleration in its Brazilian operations, which have been a significant growth driver. Despite acknowledging Nubank's impressive capacity for rapid expansion and income growth in Brazil, Citi's analysis suggests a more cautious approach due to the current market conditions.
The analyst from Citi pointed out that Nubank's stock price had appreciated by 50% year-to-date, trading at multiples of 24.2 times price-to-earnings (P/E) and 6.2 times price-to-book value (P/BV). These valuations are seen as rich, especially in the context of the bank's operational deceleration in Brazil. The bank's performance up until the third quarter of 2024 indicated a deceleration in net interest income/net interest margin (NII/NIM), prompting the firm to recommend profit-taking at this juncture.
The third quarter of 2024 was highlighted as a potential turning point for Nubank, with a combination of factors contributing to a tougher growth outlook. These included a slight decrease in average revenue per account (ARPAC), a higher cost of funding in Brazil and Mexico, and a sequential decrease in NII, particularly in the credit card segment. These challenges led to a contraction in reported net interest margin (NIM) and a drop in risk-adjusted NIM, resulting in stable pre-tax earnings after several quarters of growth.
Citi also expressed concerns that alternative revenue streams, such as payroll loans in Brazil, Mexico, and Colombia, might take longer to compensate for the slowdown in credit card and personal loan segments in Brazil. As Nubank adjusts its strategy in response to these market dynamics, the firm's outlook reflects a more conservative stance on the stock's future performance.
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