Warren Buffett’s Fastest Growing Stock

Most investors think of the Berkshire Hathaway (NYSE:BRK.B) portfolio as a composition of steady eddy stocks that produce huge cash flows and profits. It might come as a surprise then to discover that Buffett has $776 million invested in one fast-growing stock.

What is Berkshire’s fastest growing stock? Nu Holdings (NYSE:NU) grew year-over-year revenues last quarter by 106.1%. Better yet, in 8 of the 9 past quarters the top line has grown by over 100% YoY.

So, is NU stock a buy?

To get a sense of how just how monumental sales growth has been, in Q4 2020, management announced quarterly sales of $86.8 million but by Q3 2023 that number had grown by over 10x to $971.6 million. Operating income has largely turned around too from -$113 million to +$411 million over that same duration.

Clearly, Nu Holdings is doing something right, but what precisely? First off, Nu Holdings is a digital bank and financial services firm in Brazil, Mexico and Columbia primarily. It’s mobile-focused and offers both debit and credit cards to customers.

Whether users want to do money transfers, pay bills online, or even buy cryptocurrencies, Nu facilitates all of the above and it’s clearly been a big hit with them as well as shareholders, who are up 131% year-to-date.

The fast growth of the firm has the hallmarks of being an investment not necessarily made by Buffett but perhaps more likely one of his investment lieutenants, who are largely credited with some other high profile bets that don’t necessarily align with the old Berkshire playbook. For example, the investment in Snowflake pre-IPO represents a divergence from the traditional investing style honed by Munger and Buffett.

So, is it worth following in their footsteps and starting a position?

Is Nu Stock a Buy?

Of the 17 analysts covering Nu Holdings, the consensus estimate is for the share price to hit $10.06 per share, suggesting as much as 22.1% further upside opportunity.

Sometimes analysts ratings follow price action versus being a pure objective calculation on cash flows. If we look to the latter, using a discounted cash flow forecast analysis, the picture looks a little more murky. For example, a DCF analysis suggests fair value sits closer to $7.32 per share.

And a price-to-earnings ratio doesn’t invoke a whole lot of confidence that Nu Holdings is a deal at this time because it is a sky high 105x. Even the price-to-sales ratio of 12.5x is pretty lofty.

With that said, fast growing companies often trade at a premium to their sales and there is a good explanation as to why. Imagine for instance that Nu sales grow by 100% next year and again by the same amount the following year, then that PS ratio would fall rapidly from around 12x to just 3x within 24 months, representing quite the bargain.

Even Alphabet (NASDAQ:GOOG) now trades at a 5.6x price-to-sales multiple and its market capitalization is $1.6 trillion, 41x larger than Nu. Of course, they are in different industries but the point is that it’s possible for a significantly larger valuation firm to trade at a P/S multiple that is only half as large as Nu’s.

So investors in Nu now have a bit of conundrum to face. Do they buy a fast growing firm with consistently increasing EPS that is trading at high multiples or wait for a pullback?

Is Now A Good Time To Buy Nu Stock?

Relative to its 52-week high, Nu Holdings is just 8% away from its ceiling. That alone should give investors pause that the share price has been on a bull run so strong that the margin of safety is slim for new investors. 

A fair value analysis using cash flows points to 11% downside risk now and the firm’s return on equity is negative 9.0%.

The counterpoint is that, as high as the earnings multiple now is, the firm’s PEG is actually very low, at just 0.31x. That suggests Nu is trading at a low multiple relative to future earnings estimates.

Furthermore, revenues are forecast to continue rising at a rapid pace, albeit slower than the past year. The 5-year CAGR is 22.7%. If correct, expect earnings to follow in short order and impress investors. It’s very possible that quarterly earnings come in at north of a billion at some point in the next two years.

Wrap Up

Nu Holdings is Berkshire’s fastest growing stock, reporting quarterly sales growth of 106% year-over-year. That follows a string of quarterly triple digit percentage top line sales increases over the past couple of years.

As the top line has risen dramatically, so too has the bottom line caught up and moved from over $100 million in the red to $400 million in the black.

The rapid increase in earnings and the expectation for them to continue have resulted in a low price-to-earnings growth ratio of just 0.31x suggesting that new buyers could enjoy much higher prices in the coming years.

Short-term, it seems that Nu holdings is pretty fairly valued, and even overvalued on a cash flows basis. Still, analysts remain optimistic that the intrinsic value of the firm is over 20% higher from present levels. Those estimates are in place even after the stock has more than doubled in the past year.

The odds are Nu holdings, trading near its 52-week high, will have a pullback in the relatively near future and that might be the opportune time to enter with a wider margin of safety than exists now.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.