Tech Positions

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Nubank (NU Holdings) is a Brazilian fintech company that aims to create deep-rooted customer loyalty in order to remove barriers to adoption of digital banking products and streamline financial services. Since launching in 2013, Nubank has leveraged their unparalleled technology expertise to build out advanced AI and machine learning models with proprietary client data to improve credit underwriting, customer experience, and product offerings. The platform addresses consumer pain points in Brazilian – and more recently, Mexican and Colombian – financial services, offering fee-free credit cards and an expanding portfolio of services for both consumers and small businesses.

Our analyst, Kavya Kalathur, lays out the thesis on NU in three main main pieces:
 

(1) Geographic Expansion, TAM Growth: The company's recent expansion into Mexico in 2019 and Colombia in 2020 and continued rollout of successful products in the Brazilian market into new geographies offers new avenues for top-line growth. With the expansion, NuBank extends its total addressable market (TAM) to include 60% of the Latin American population and 61% of the region’s GDP. There are few barriers preventing the neobank from scaling throughout Latin America – a region with a total GDP of $6.2 trillion and 656 million inhabitants, over 70% of whom own smartphones – presenting a massive opportunity for Nubank. Penetration for both Nu Accounts and Nu Credit Cards are severely underestimated in newer markets. Continued user growth through Nu Credit Card and NuAccount in Brazil, Mexico, Colombia, and new Latin American markets drives 137% growth to 222.8 million Active Customers by FY2028 

(2) Post-Recessionary Lending Growth: Recent recessionary environments in both Brazil and Mexico (with Brazil key Selic rate reaching 13.75% in 2Q2023) are forcing the company to remain extremely conservative in issuing personal loans. Brazil’s lending market is expected to be revived as interest rates start to cool (Selic rate already down to 10.5%). Given that digital banks are occupying an increasing share of the Brazilian personal loan market (>6% in market share between FY2021 and FY2023) and that NU is phasing in their personal loan product in Mexico, we expect non-Brazilian markets to account for nearly 30% of sales by FY28.  
 

(3) SME Product Rollout: Nu Holdings boasts a highly engaged and loyal customer base. Low ARPAC presents an opportunity to increase cross-selling capabilities and profitability, especially to SMEs. Nu Holdings is 1 of the 5 top players in the small and medium enterprise (SME) banking segment in Brazil. Focusing on payroll services can yield greater ARPAC, as payroll services have historically been found to be attached to users’ primary bank accounts. Additionally, the company is actively rolling out SME products in Mexico that have seen great success in Brazil.
 

The risks around NU are what you might expect given it is often categorized as a “Brazilian Fintech”. What is often glossed over is the simple scale of the opportunity in terms of users and revenue per user in financial services that many of us take for granted in the US. Kavya forecasts >25% CAGR in revenues and $2.14 in FY28 EPS versus sell side models closer to $1.70-1.80. Using a reasonable 15x P/E and discounting back gets to a price target over $19 relative to today’s level near $12. We have owned the stock since $8.50 and plan to hold long term. 

There are often great investment opportunities in products that solve constraints in high growth segments. PSTG solves data transfer rate, power, and space constraints in next gen data centers used by “cloud titans” such as META and GOOG.

PSTG has its roots as a performance storage vendor before concepts such as artificial intelligence, machine learning, and “cloud” datacenter became mainstream. This hybrid positioning has allowed them to gain share in both traditional markets and the most cutting edge datacenter designs and the financial results are now backing up that trend. Our analyst, Kate Carpenter, models this revenue acceleration much faster than consensus estimates with a roughly +30% CAGR over the next 3 years while consensus sits in the low-mid teens and she gets to EPS of $2.78 vs consensus of ~$2.31. Her optimism is based in both the product performance at key customers willing to build capacity along with a proven operating model that should scale to 70%+ gross margins and operating margins approaching 20% within her forecast window.

She is using a $70 price target, partially to be respectful of the risks of an eventual pause in AI/datacenter and partially to acknowledge the stock isn’t cheap on forward earnings. But with what we all see as a secular trend towards high end datacenter Capex and the recent turbulence in the broader AI ecosystem, we are all excited to see that happens next at PSTG. 

1. Structural challenges from the shift to probabilistic advertising reduces future growth path. The introduction of Apple Tracking Transparency shifted the industry from deterministic advertising (direct targeting and tracking) to inherently intractable and thus less precise probabilistic advertising. To improve the ROI for advertisers with probabilistic techniques thus requires significant scale and computing power; as such, walled gardens (GOOGL, META, AMZN) have been able to leverage their vast first-party datasets to sustain their conversion advantage for advertisers, while smaller platforms such as PINS struggle to catch up. In other words: while experimentation with other platforms could previously be fruitful for advertisers to explore whenever GOOGL or META became too expensive, the lack of visibility makes this unviable. This increasingly divergent scale advantage is only deepened by the emergence of AI.

2. Third-party partnerships are not the boon for PINS that everyone hopes for. ATT has led to an increase in cross-platform partnerships to leverage more collective 1st-party data, shifting the source of value creation away from leads to conversion. The PINS-AMZN deal has stirred excitement in the market, framing it as fundamentally changing PINS’ opportunity set by filling out the ad inventory necessary to drive conversions and thereby improve its long-disappointing ad pricing. However, the deal does not resolve PINS structural headwinds to monetization due to 1) its lacking native and social media content which reduces the opportunity for brands to build trust, recognition, and drive ROI 2) its niche, penetrated, and slowly scaling audience, and 3) its fundamentally lower ROI from longer lead times on purchasing decisions due to the nature of PINS content (less immediate, repeatable, more higher value, one-off). Additionally, the partnership fails to link user accounts, thus still leaving advertisers unable to comprehensively link awareness (PINS) with purchasing conversion (AMZN); PINS is effectively a funnel to AMZN, who retains the highest value portion of the transaction (conversion). Lastly, the walled gardens are striking similar deals (META-AMZN), though with linked accounts to collectively leverage their vast first-party data.

3. Spending more to stand still. While growth is slowing, the intensely competitive landscape makes pursuing these avenues non-negotiable. However, both the integration of third-party partnerships and the nascent AI opportunity require significant tech investment. This leads to two important cost implications: firstly, building out the required infrastructure costs META the same as it does PINS, further evidencing the increasingly diverging benefits of returns to scale. Secondly, the technology behind partnerships and data sharing requires a non-trivial effort from advertisers; as such, advertisers will prioritize the implementation for the largest ad platforms first.

 Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.