Nu Holdings: The Misunderstood Quarter

Nu Holdings (Nubank) reported strong Q1 2025 results, with revenue up 40% YoY (FX neutral) to $3.25 billion and net income surging 74% YoY (FX neutral) to $557.2 million, driven by customer growth and increased engagement, particularly in Brazil where it serves 60% of the adult population; expansion into Mexico and Colombia is also showing promising growth, despite some analyst concerns about slower revenue growth and margin compression due to strategic investments in these new markets, the company's management remains confident in its long-term growth trajectory and operating leverage.

Analysis

Nu Holdings (NU) demonstrated robust Q1 2025 performance, highlighted by a 40% year-over-year (YoY) increase in FX-neutral (FXN) revenue to $3.25 billion and a 74% YoY FXN surge in GAAP net income to $557.2 million, despite a nominal EPS of $0.11 slightly missing expectations of $0.12 due to significant currency fluctuations. Customer acquisition remained strong, with 4.3 million new customers added in the quarter, bringing the total to 118.6 million, and exhibiting a high monthly activity rate of 83.2%. Monthly average revenue per active customer (ARPAC) grew 17% YoY FXN to $11.2, with mature cohorts already achieving around $26, underscoring substantial monetization potential against an exceptionally low cost to serve of $0.7 per customer. Operational efficiency further improved, with the efficiency ratio reaching an outstanding 27.4% and operating expenses declining 12% quarter-over-quarter (QoQ) to $523.2 million. Credit quality management appears sound; the 15-90 day NPL ratio rose 60 basis points to 4.7%, aligning with expectations, while the 90+ NPL ratio encouragingly decreased by 50 basis points to 6.5%. Deposits increased 48% YoY FXN to $31.6 billion, and total receivables expanded 40% YoY FXN. While Brazil remains a stronghold, serving 60% of the adult population, growth in Mexico (11 million customers, up 67% YoY) and Colombia (nearly 3 million customers) is accelerating, supported by strategic investments and, in Mexico's case, a newly approved banking license expected to fuel further expansion from mid-2026. Analyst concerns regarding a $42 million deferred tax asset benefit, the Mexican licensing timeline, slower nominal revenue growth, and net interest margin (NIM) compression to 17.5% (risk-adjusted NIM to 8.2%) were addressed by the company and the article's author as either misinterpretations of FX impacts, standard business timelines, or deliberate strategic choices for long-term growth, such as offering higher deposit rates in new markets. The increase in loan loss provisions was attributed to GAAP requirements driven by significant portfolio growth (up 70% in originations for some loan types) rather than deteriorating underlying credit quality per loan, with NPL ratios relative to portfolio size reportedly improving. The article posits that Nu's valuation, with a 2025 forward PEG of 0.80 and a 2026 PEG of 0.43, suggests it is undervalued, especially considering its high growth, operating leverage, and unique business model compared to traditional banks.

Key Decisions for Investors

• Investors should evaluate Nu Holdings based on its FX-neutral growth metrics and long-term expansion strategy in Latin America, particularly in Mexico and Colombia, recognizing that current margin pressures are likely temporary investments for substantial future market share.
• Focus on key performance indicators such as ARPAC growth, customer acquisition rates in new geographies, the cost-to-serve ratio, and the evolution of NPL ratios versus loan portfolio expansion to validate the company's execution and ongoing operating leverage.
• Given the disconnect between strong underlying FX-neutral performance, positive long-term outlook, and analyst concerns primarily focused on short-term nominal figures or accounting interpretations, periods of market negativity could present attractive entry points for long-term growth-oriented investors.
• Consider the company's differentiated, highly efficient digital banking model, which allows for rapid scaling and high returns on equity (27% reported), as a significant competitive advantage that may not be fully captured by traditional bank valuation metrics.