Nu Holdings (NU): A High-Conviction Buy in the Digital Banking Sector Amid Strong Earnings and Strategic Expansion

In the ever-evolving fintech landscape, Nu Holdings (NYSE: NU) has emerged as a standout player, defying macroeconomic headwinds and outperforming peers with its disciplined growth strategy and digital-first model. The recent bold double upgrade from Citi—from a "Sell" to a "Buy" rating, coupled with a price target doubling to $18—has sent ripples through the market, signaling renewed confidence in the company's ability to navigate volatility while accelerating earnings growth. This move, supported by broader analyst sentiment and institutional buying, underscores Nu's resilience and untapped potential in emerging markets like Mexico and Colombia.

Citi's Upgrade: A Vote of Confidence in Nu's Resilience and Earnings Momentum

Citi's upgrade is not a mere reaction to short-term gains but a reflection of Nu's structural strengths. The company's Q2 2025 results were a masterclass in navigating macroeconomic turbulence. Revenue surged 32.1% year-over-year to $3.7 billion, with net income hitting a record $637 million. These figures highlight Nu's ability to scale profitably even as it expands into higher-cost markets.

The upgrade hinges on three pillars:
1. Resilient Earnings: Nu's return on equity (ROE) of 28% far outpaces peers, driven by its low-cost digital infrastructure and efficient risk management. Despite rising interest rates and inflationary pressures in Latin America, the company maintained a disciplined approach to credit underwriting, with non-performing loan (NPL) ratios remaining well-controlled.
2. Margin Management: While Nu's net interest margin (NIM) dipped slightly in Q2 2025 due to expansion costs, the company's operating leverage—cost per customer now below $1—ensures long-term profitability. Analysts note that Nu's gross margin of 42.2% (down from 48% in Q2 2024) still outperforms traditional banks, which typically operate at 30–35%.
3. Strategic Pricing Power: A critical test in Mexico—where Nu reduced deposit rates from 15% to 11.5%—revealed its product-led model's strength. Despite competitive offers from legacy banks, Nu retained over 90% of its deposit base, proving customer loyalty is rooted in user experience, not just promotional rates.

Untapped Potential in Mexico and Colombia: The Next Growth Catalysts

Nu's expansion into Mexico and Colombia is no longer speculative—it's a proven engine of growth. In Mexico, the company now serves 12 million customers (13% of the adult population), with deposits surging to $6.7 billion. The recent approval of a banking license in April 2025 has unlocked new revenue streams, including payroll portability and SME services. This license also provides deposit insurance, a critical trust-building tool in a market where only 36% of adults have access to such protections.

Colombia, meanwhile, has become Nu's fastest-growing market. Customer numbers tripled to 3.4 million (10% of the adult population), with deposits exploding by 841% year-over-year to $2.1 billion. The company's AI-driven credit models, which analyze 30,000+ data points per user, have enabled aggressive yet conservative lending, keeping NPLs in check even as it scales.

The key to Nu's success in these markets lies in its dual-growth model:
- Deepening Engagement: Cross-selling credit cards, investment tools (e.g., Money Boxes), and insurance has boosted Monthly Average Revenue Per Active Customer (ARPAC) to $12.2, up 18% year-over-year.
- Capturing the Unbanked: With over 50% of Mexico's population and 80% of Colombia's still unbanked, Nu's scalable infrastructure allows it to reach these demographics at a fraction of traditional banks' costs.

Analysts' Outlook: A Compelling Case for Long-Term Growth

The investment community is increasingly bullish. Citi's $18 price target implies a 29.6% upside from its August 2025 closing price of $13.89, while Barclays and JPMorgan have raised their targets to $16 and $14, respectively. The average 12-month price target across 21 analysts now stands at $14.15, with a high of $19.56.

Looking ahead, analysts project 29% revenue growth and 36% EPS growth in 2025, followed by 24% and 38% in 2026. If Nu meets these targets and its valuation multiple expands from 17x to 25x forward earnings, the stock could rise to $19—a 46% gain from current levels. This potential hinges on two factors:
1. Macroeconomic Stability: A slowdown in Brazil's inflation or a stabilization of the real-dollar exchange rate would reduce operational volatility.
2. Margin Preservation: Nu must avoid overextending in lower-margin segments like secured lending while maintaining its disciplined cost structure.

Risks and Mitigants

While Nu's growth story is compelling, risks remain. Higher funding costs in Mexico and Colombia, coupled with rising interest rates, could pressure margins. Additionally, regulatory scrutiny in Latin America—particularly in Mexico's concentrated banking sector—poses a challenge. However, Nu's proactive risk management, including AI-driven credit models and a focus on long-term customer NPV, provides a buffer. The recent hiring of Roberto Campos Neto, former Central Bank Governor of Brazil, as Vice-Chairman further strengthens its regulatory navigation capabilities.

Conclusion: A High-Conviction Buy for Patient Investors

Nu Holdings is a rare combination of a high-growth fintech and a disciplined operator. Citi's upgrade, coupled with institutional buying and analyst optimism, validates its ability to thrive in challenging environments. For investors seeking exposure to the digital banking revolution in Latin America, Nu offers a compelling thesis: a scalable platform, proven resilience, and vast untapped markets.

Investment Advice: Buy Nu Holdings (NU) for a long-term position, with a target of $18–$19. Monitor macroeconomic indicators in Brazil and Mexico, and consider partial profit-taking if the stock approaches $16–$17 to lock in gains while maintaining exposure to its expansion story.