This is why Nu Holdings outperforms most Fintech stocks

There was a lot to like Now Holdings‘ (NOW 2.84%) recently released earnings report for the first quarter. The Brazilian fintech company generated record revenues of more than $1.6 billion and record net income of nearly $142 million, representing Nu’s third consecutive profitable quarter. The company has also added another 4.5 million customers, bringing total customers to more than 79 million and effectively banking 46% of the Brazilian adult population, which is incredible.

But despite all this success, there is one thing that makes Nu better than most other fintech companies. Let’s take a look.

Nu Holdings operates with tremendous efficiency

Nu started offering credit cards with no annual fees and using a very elegant digital platform to make it easier for Latin American citizens to access the banking system. The company has largely followed this path as it unveiled other products as well, which led to the bank having a lower monthly average revenue per active customer (ARPAC) than incumbent banks in Brazil.

But this model also allowed Nu to scale by growing customers very quickly and serving those customers at a very low cost while maintaining high customer satisfaction. The results have been excellent.

Image source: Nu Holdings. Notes: All data presented are for Brazil only. Net interest income (NII) is calculated as interest income and gains (losses) on financial instruments minus interest and other financial costs. F&C = Fee and commission income. Costs include transaction costs and operating costs. Efficiency ratio = Total operating costs plus transaction costs divided by NII and fees and commission income. SBC = Share-based compensation. ARPAC = Average revenue per active customer. Monthly ARPAC is calculated as average monthly revenue (total revenue divided by the number of months in the period) divided by the average number of individual active customers during the period (average number of individual active customers is defined as the average number of active customers monthly active customers at the beginning of the measured period, and the number of monthly active customers at the end of the period). Cost to serve = The monthly average of the sum of transaction expenses, customer support and operating expenses (the sum of these expenses in the period divided by the number of months in the period) divided by the average number of individual active customers in the period (the average number of individual active customers is defined as the average of the number monthly active customers at the beginning of the measured period, and the number of monthly active customers at the end of the period).

As you can see in the right chart, Nu was able to gradually increase ARPAC while keeping the cost of serving customers at just $0.80 per customer and very low cost of customer acquisition as well.

This translates into a ton of operational leverage where the company increases revenue at a much faster clip than expenses, which then drives down the company’s efficiency. The efficiency ratio looks at expenses expressed as a percentage of revenue, so lower is better because it means a company is spending less to generate more revenue.

Nu’s efficiency rate in the 1st quarter fell all the way to 36.9%, and it would have been below 33% if share-based compensation is taken out. Still, under 37% is among the lowest in the industry, especially for a bank or fintech company of Nu’s size.

There is also good reason to believe that Nu can maintain this efficiency and even reduce it by gaining more operating leverage. On Nu’s most recent earnings call, management said it believes it can keep the cost of serving customers at or below $1 while realizing additional revenue synergies.

“We see this as just the beginning as we expect to benefit from the full potential of the platform’s operational leverage as we continue to grow our customer base, up- and cross-sell products, launch new features and earn flat results in our Nu geos. of Mexico and Colombia, which are still running a deficit,” Nu’s CFO Guilherme Lago said.

While ARPAC across the Nu company is only $8.60, it has reached $24 for some of Nu’s most mature customer groups, and there should be other ways to increase ARPAC by targeting Nu’s high-income customers.

Operational leverage is key

Key to Nu’s story is the incredible operating leverage it is able to generate, which translates into an industry-leading efficiency ratio. While you’ll hear many other fintech companies brag about customer growth, not many brag about profitability or operating leverage, especially to the extent Nu has been able to deliver.

And the exciting thing about Nu is that there really seems to be a lot more room for growth, which is probably a big reason for the company’s high valuation.