Nu Holdings' Shift from Russell Midcap: A Strategic Rebalance or Cause for Concern?

The removal of Nu Holdings (NYSE:NU) from the Russell Midcap and Midcap Growth indexes on June 27, 2025, has sparked debate among investors: Is this demotion a warning sign or a catalyst for a buying opportunity? The answer lies in understanding the interplay of index dynamics, valuation metrics, and the company's fundamental trajectory.

Index Dynamics: A Structural Shift, Not a Downgrade

The Russell reconstitution, occurring annually to ensure indexes reflect evolving market conditions, is a mechanical process. Nu Holdings' exclusion from the Midcap indexes stems from its growing market capitalization, which now qualifies it for the Russell Top 200, a more prestigious grouping of large-cap companies. This move, effective June 27, underscores that its size has outgrown the mid-cap threshold—a natural progression for a firm that has nearly tripled its total shareholder return (238.87%) over the past three years.

Critically, the reclassification does not signal underperformance. Rather, it reflects Nu's ascent into a tier of companies like Palantir Technologies (PLTR), which similarly moved from mid-cap to large-cap indexes while executing strategic partnerships and growth initiatives. The shift may temporarily disrupt passive fund flows tied to the Midcap indexes, but active investors should focus on the Russell Top 200 inclusion, which could attract new capital.

Valuation: A Stock Undervalued Relative to Growth Prospects

Nu's shares currently trade at $12.44, below the $14.55 consensus target, suggesting the market has yet to fully price in its growth potential. This disconnect is puzzling given its recent quarter, which saw a 29% stock price surge and robust earnings growth driven by expansion into secured lending and new fintech services.

The company's valuation metrics are compelling. Its price-to-earnings (P/E) ratio of 14.5x lags behind peers like PayPal (PYPL) (27.3x) and Square (SQ) (29.1x), despite Nu's faster revenue growth (22% YoY vs. PayPal's 8%). This gap hints at a mispricing, especially as Nu's initiatives—such as international expansion and AI-driven underwriting tools—begin to scale.

Fundamentals: A Foundation of Resilience

Nu's recent performance is underpinned by strategic moves and leadership changes. The appointment of Roberto Campos Neto, former head of Brazil's central bank, as a senior advisor signals a focus on regulatory acumen and emerging markets—a critical edge in a global fintech landscape. Meanwhile, its secured lending division now accounts for 30% of revenue, up from 15% in 2023, demonstrating diversification success.

Long-term trends are equally bullish. Nu's total shareholder return has outpaced the broader U.S. market (13.7% annualized over one year) and the U.S. Banks industry (27.3% over the same period), despite macroeconomic headwinds. This resilience is no accident: the company has reduced operational costs by 18% since 2022 while boosting loan origination volumes by 40%.

Investment Implications: A Buy with a Long-Term Lens

The Russell reclassification is not a red flag but a structural adjustment. While short-term volatility is possible as index funds rebalance, the Russell Top 200 inclusion and Nu's fundamentals suggest this is a buying opportunity. Investors should consider:

1. Valuation Discount: The stock's undervaluation relative to growth peers creates a margin of safety.
2. Strategic Momentum: New services and leadership signal execution capability.
3. Index Dynamics: The Top 200 inclusion may attract institutional capital, offsetting Midcap exits.

However, risks remain. Regulatory hurdles in new markets and slower-than-expected AI adoption could pressure margins. A 12-month price target of $14.55 implies a 17% upside, but investors must be patient—nuanced progress will take time.

Conclusion: A Strategic Move, Not a Retreat

Nu Holdings' shift from the Russell Midcap Index is best viewed as a reflection of its growth, not a decline. With a compelling valuation, strong fundamentals, and a clear path to scaling its fintech ecosystem, this is a prime entry point for investors willing to overlook short-term noise. For those focused on long-term value creation, Nu offers a rare blend of upside and resilience—a buy with conviction.