Warren Buffett Just Sold Nu Stock. Here's Why You Probably Shouldn't.

Warren Buffett, the renowned investor and CEO of Berkshire Hathaway, recently sold a significant portion of his stake in Nu Holdings (NU), the Brazilian digital bank. This move has raised eyebrows among investors, but it's essential to understand the context and the reasons behind Buffett's decision before making any hasty conclusions. In this article, we'll explore the factors contributing to Buffett's sale and why you might still want to consider Nu stock.

Buffett's Sale: A Closer Look

Buffett sold approximately 19% of his stake in Nu Holdings during the third quarter, reducing his position to around 86.4 million shares. This sale represents a significant reduction in Berkshire Hathaway's holding in Nu, as the stock accounts for only 0.3% of the equity portfolio. While this move may seem concerning, it's important to note that Buffett still maintains a substantial stake in the company, indicating that he continues to believe in Nu's long-term prospects.

Several factors may have contributed to Buffett's decision to sell Nu stock:

1. Valuation: Nu stock has a high valuation, fetching 32 times this year's earnings and 23 times next year's analyst target. This high valuation may have been a factor in Buffett's decision to sell, as he is known for his value investing approach.
2. Growth concerns: Although Nu's growth has been impressive, there have been some concerns about slowing sequential growth in key metrics like average revenue per active customer (ARPAC) and net interest margin.
3. Brazil's economic volatility: Brazil's high inflation and interest rate hikes could potentially impact Nu's financial performance in the near term. Buffett might have been cautious about this macroeconomic uncertainty.
4. Portfolio rebalancing: Buffett may have been rebalancing his portfolio, reducing his stake in Nu to make room for other investments. Nu was a relatively small position in Berkshire Hathaway's equity portfolio.
5. Long-term perspective: Buffett might have sold some shares to lock in profits from Nu's impressive run, while still maintaining a significant stake in the company. This could indicate that he still believes in Nu's long-term prospects.



Nu's Financial Performance and Long-Term Growth Prospects

Despite Buffett's sale, Nu's recent financial performance demonstrates strong growth and profitability, which bodes well for its long-term growth prospects. Here are some key points from the materials that support this:

* Revenue increased by 56% year over year in the 2024 third quarter, and net income more than doubled to $553 million (Nu Holdings, 2024).
* Average revenue per active customer (ARPAC) increased by 25% year over year on a currency-neutral basis, although it was down sequentially on a reported basis (Nu Holdings, 2024).
* Net interest income increased by 63% over the previous year, although net interest margin narrowed year over year and sequentially (Nu Holdings, 2024).
* Nu added 5.2 million members in the quarter, bringing the total to 109.7 million. It continued to show strong momentum in Brazil, Mexico, and Colombia (Nu Holdings, 2024).

These financial results indicate that Nu is successfully expanding its customer base and generating significant revenue and profit growth. Although there was a slight slowdown in ARPAC growth and net interest margin, the overall performance remains robust. The company's ability to attract new customers and increase engagement, as well as its expanding presence in multiple markets, suggests that Nu's long-term growth prospects are strong.

Moreover, Nu's profitability and cash flow generation allow it to support growth in its newer regions while maintaining impressive profitability. This financial strength enables Nu to invest in its business and pursue expansion opportunities, further enhancing its long-term growth prospects.

Nu's Exposure to Brazil's Volatile Economy

Nu's exposure to Brazil's volatile economy can be seen as both a challenge and an opportunity for investors. On one hand, the high inflation and interest rate hikes in Brazil can affect Nu's financial performance in the short term. For instance, the drop in the value of the Brazilian Real affects Nu's reporting, as seen in the decrease in average revenue per active user (ARPAC) on a reported basis, despite a 2% increase currency neutral. Additionally, the market was concerned about how the recent interest rate hike in Brazil would affect Nu's business.

On the other hand, Nu's management has been effective in navigating these macroeconomic pressures. The company has been able to use its earnings to support growth in its newer regions while maintaining profitability. Nu's robust credit business also rounds out its full financial services platform, further insulating it from short-term economic fluctuations.

Moreover, Nu's long-term growth prospects remain strong. The company has been adding members at a healthy pace in Brazil and is growing even faster in its other markets, such as Mexico and Colombia. Nu's ability to attract both mass consumers and higher-income populations, along with its expansion into new markets, positions it well for long-term success.

Why Nu Stock Might Still Be an Attractive Investment

Despite Buffett's sale, Nu stock might still be an attractive investment for several reasons:

1. Strong financial performance: Nu's recent financial results demonstrate robust growth and profitability, indicating that the company is well-positioned for long-term success.
2. Expanding market presence: Nu's customer base continues to grow, and its expansion into new markets, such as Mexico and Colombia, presents significant opportunities for future growth.
3. Effective management: Nu's management has demonstrated the ability to navigate macroeconomic challenges and maintain profitability, even in the face of short-term headwinds.
4. Attractive valuation: Although Nu's valuation is high, the company's strong growth prospects and profitability may justify its premium valuation.

In conclusion, Warren Buffett's sale of Nu stock does not necessarily indicate a loss of confidence in the company. Instead, it could be seen as a normal part of portfolio management and rebalancing, given Nu's high valuation and the potential short-term challenges it faces in Brazil's volatile economy. Nu's recent financial performance, expanding market presence, and effective management make it an attractive investment opportunity for those with a long-term horizon and an appetite for risk.