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- [00:00]
Brett Schaefer
Foreign.
- [00:05]
Ryan Henderson
Welcome to Chitchat Stocks. On this show, hosts Ryan Henderson and Brett Shafer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett or any other podcast guest is not formal advice or recommendation. Now please enjoy this episode.
- [00:33]
Brett Schaefer
Welcome into Chit Chat Stocks, a podcast to help you find your next great investment. My name is Brett Schaefer and today we have on Dave Ahern from Investing for Beginners and Value Spotlight to discuss new bank slash new holdings. For anyone that hasn't heard of them, they are a Latin American fintech company and online bank. The ticker is NU if you want to do research yourself. Dave welcome back to the Chit Chat Stocks podcast. Before we discuss nubank, to give context for the listeners, tell us about Value Spotlight and what maybe a lot of listeners already know about the Investing for Beginners podcast.
- [01:13]
Dave Ahern
Yeah, thanks Brett. It's awesome to be back again. I always enjoy listening to your show and it's fun to be on the other side once in a while as well. So the Investing for Beginners podcast is a podcast Andrew and I started a little over seven years ago where we basically help demystify financials and the stock market for beginners, intermediate investors. And it's a show that we do twice a week and so you can go there if you're newer to the investing world. It can kind of help you undercover really what's going on in the stock market. Value Spotlight is a investment portfolio that our co founder Andrew started way back when in 2014 and recently he has stepped away and asked me to take over for it. And so I am going to try to continue in the tradition of investing $150 a month with the goal of generating 11% returns over a 40 year time horizon. The goal is not to beat the S&P 500, it's the goal is to beat the 10% return you would get in the S&P 500 over a 40 year period. And we buy more conservative type stocks, try to find things with a margin of safety and just kind of try to broaden everybody's horizons. We do one monthly pick a month and it's a real money portfolio. So Andrew and I both put the money into the stocks and that's. Yeah, that's it.
- [02:36]
Brett Schaefer
If you care about fundamental research, if that's your type of thing, you're not chasing, which I think listeners of our show are not chasing, the quantum stocks, any sort of FOMO out there. This is the type of newsletter you should definitely check out and see if it's for you. Let's talk about new holdings. It's coming to you followed for a long time. I know you're a shareholder. On our show we did a research report on the company. I think it was, sometimes I get my timelines wrong. It was either this year or the year before. But it's again a Latin American banking company. They start in Brazil, they're in Mexico and Colombia now and maybe expanding to new countries. We're going to talk about that during this episode. But for context for the listeners, what does the new holding, new bank business look like today?
- [03:23]
Dave Ahern
Well, it's an amazing business. Like you said, it is a bank. So they do offer lending, they offer checking accounts, they have savings accounts and all the typical things you would see with a bank. One of the things that separates them from legacy banks, especially in Brazil, is that they're a digital only bank, which means they have no branches. And some of the listeners may be thinking, big deal, whatever. That's old news. We have Ally bank here, we have Sofi bank and all the fintechs and whatnot. But in Brazil, this was revolutionary. When David Velez, the founder, started the company, this was a revolutionary thing. And the other thing that sets them apart is because they're a digital native bank, their bank apps are digitally native as well. So they're built for to be a digital bank from the ground up. Whereas the competitors, Banco de Brazil, Itau, you know, banks like that are, you know, legacy banks that built an app as an afterthought. And so the, the Brazilian bank, the new bank, their app is super easy to use, it's super easy to sign up, it's super easy to create an account. And again, you're probably thinking, well, whatever this, that sounds great. But what we don't realize here in America is in Brazil, a lot of people don't have access to cars. A lot of the little cities that they live in don't have a bank. And so if you want to go to a bank, then sometimes you're looking at 50 to 100 mile travel. And anybody who's ever traveled in Latin America knows that 50 to 100 miles can be a bit of a challenge. So there's that. So because they started digitally native, they were able to grow very, very, very quickly. And to that point now the company, the company has about 120 billion or 120 million customers across Brazil, Mexico and Colombia right now and about 105 of those are active. So like an 83 activity rate, which is pretty amazing. In Brazil they have 110, sorry, 102 million customers and about 60% of those are active. So the company is a huge business and it's growing very, very quickly. I think they're the largest bank in Brazil now as far as customers go. And so they're growing very, very fast. So it's an amazing business. I could go on and on and on. I'll stop now.
- [05:48]
Brett Schaefer
Yeah, it is a complicated business. So we will, let's start with Brazil first and then we'll talk about the various growth opportunities and valuation later. They have 60% of the adult population. They still seem to be growing quite well. I'd kind of ask, and this is maybe a two parter that relates to each other, how do they plan to keep growing in Brazil and what does the actual credit and financial services look like? Is it mainly credit card loans, unsecured personal loans, kind of like a SoFi, or is it a mix of everything and that's what they're going after?
- [06:25]
Dave Ahern
Yeah, that's, that's a great question. So the way that they're going to continue to grow in Brazil is by, there really is two, two parts. One is yes, 60% of adults are customers of Nubank. So they still, in theory, they still have 40% to go. Right. So they will continue to, to target the people that are not continuing to bank with them. And in part, the way they're going to do this is by making lending easier. So the things that they're doing to make lending easier is let's, I mean, let's back up for just a second. So I want to kind of explain how credit works in Brazil. It's a little bit different than it is here in the United States. So to, I guess to better understand how credit works in Brazil, Brazilians typically get paid monthly. So they get paid once a month. And what they do is they do the majority of their shopping and their bill payments on a monthly basis. For example, a typical company will go to the grocery store in their local store and there they'll actually have an account at the bank, at the grocery store that allows them to pay in installments. And this is called, it's a credit account, it's called fiato. And what Nubank has done is they've actually turned that on the edge and they, they doing the same thing with their cards. So when you get a credit card in Nubank here in the United States, you get a credit limit typically on how much you know how much your credit is. So if you have a 750 credit score, you can get a $5,000 limit on a new credit card, for example. Or if you have a sub 600 credit score here in the U.S. you have to get what's called a secured credit card, which means you have to put a fixed amount down and that's the limit you get. And then as you build up your credit by using the card, then eventually the bank will, will give you a real credit card, so to speak, and you get the $300 back. And so when I worked at Wells Fargo, we had a minimum of $300 you had to start with to get a secured credit card if you had a sub, subprime credit limit in Brazil. What Nubank did, which is kind of brilliant, and this is what something that Fetty Sandler explained to me, what they did was they give you an account, they basically look at your cash flow in your credit, in your checking account, and they give you a credit limit based on your ability to pay that back. So let's say that you are, you don't have a lot of cash flow and maybe you can only afford $100 for a credit limit. They will give you the credit card, which is called a Roshinia, it's a purple credit card. And they'll give you this credit card and they'll give you $100 limit. And as you use the credit card and pay it back, they will, they will gradually and start using your account more. They will gradually raise your credit limit. And so that's how Brazil has, has really kind of established credit as a means of paying for things in Brazil. And they're basically taking off of the old school way of using credit in Brazil. And so it's not that, it's not that dissimilar to what Brazilians are already used to. So Brazilians actually will carry a little bit of a higher limit on their cards than Americans do, which is good for Nubank. It's, you know, it's not obviously the greatest for the customer, but it's good for the bank because they make more money from the interest that they charge on those credit cards. Now, the cards that Nubank offers are free, so there's no annual fee for those cards like there is for most companies here in the United States. But that is, those are kind of the two ways that they're setting themselves apart. They are doing, they have expanded into doing fixed loans. So like, you know, an auto loan or a fixed payment loan, say you borrow 10,000 reais, then you pay it back in fixed installments. They are branching out into that. But there are two main forms of credit are credit cards and secured credit cards. Now they have, they have started branching out into payroll loans and some accounts receivable loans on the business side of things have started expanding into that. But those are our newer, I guess, expansions of credit for the bank. But the vast majority of the money they make comes from credit cards.
- [10:30]
Brett Schaefer
Okay, that's a great overview. Clearly they are pretty stable at the moment in Brazil. That's where most of their profits coming from. As you mentioned, one of the largest banks out there. And we don't need to talk about how they're gaining deposits and all that stuff. It just seems to be the steady momentum in that country. One area. And I'll bring some stats to kind of lead into this question. From their recent investor relations presentation which was from the second quarter. This is recording before their Q3 earnings are out. Look at Mexico. They've grown from 2022, they had 2.7 million customers. They have 12 million today. That is 13 of the population. They went from basically zero deposits to 6.7 billion in USD. They are expanding their number of credit card customers at, if we look at, looks like 9% of the population is one of their credit card customers. What are your thoughts on the potential of Mexico and can they get from that, you know, 10% today to the same level of penetration as they have in Brazil, which for reference Mexico is a similar sized economy to, to Brazil.
- [11:46]
Dave Ahern
Yeah, I, I wholeheartedly believe they will be able to get, to get there. They're, they're, they're executing the exact same playbook that they did in Brazil. They're targeting the unbanked of, of Mexico and they're going after those people that just don't have access to banking. Whether it's because of what I mentioned earlier, not having a bank or not having access to a bank, a car, transportation, any of those kinds of things. Again, going back to what I've experienced in Brazil and I'm sure this applies to Mexico when we think about our lives here in the United States. Just a quick question, Brett. How many devices do you have in your house, like a laptop computer, any of those kinds of things?
- [12:30]
Brett Schaefer
I think four or five at least. If you include. Not including TVs or anything like that. Yeah, at least, at least four or five. Everyone's got, you know, phone, tablet, laptop or computer. At least you would say some of that. Especially someone like us that works in the Digital economy, right.
- [12:51]
Dave Ahern
And so my wife and her family all have this and that's it. Like when you go to stay with a family in Brazil, they may all have iPhones and maybe occasionally they'll have a tablet or something, but they all have iPhones. And so as iPhones continue to expand or Samsung phones, as those continue to expand, that gives all these people that have never had access to a computer access to a computer. And so something like a new bank who is way ahead of the curve on the technology, gives those people access to banking. Now they have never had access to that. And as those economies start to evolve and get better, that just gives more and more opportunity for nubank to continue to expand. And I've never been to Mexico other than the touristy places, so I can't speak to this directly, but I got to imagine that it's very similar to what it's like in the smaller cities or smaller towns of Brazil or Colombia where there's just a lot of opportunity, a lot of people that have been unbanked because they didn't have access to the technology. And now that they're starting to get access to the technology, they're getting access to banking. And because new bank is so easy and digitally native, it's just easy to do so I see no reason why they won't be able to have the same similar success in Mexico that they've had in Brazil. Maybe not to this full extent, but I think they will have the, the there is more competition now because a company like Mercado Pago from, from Mercado Libre is certainly going to compete in Mexico and that is going to put more pressure on nubank for sure, but I don't see any reason why that playbook can't continue.
- [14:32]
Brett Schaefer
Now I can speak anecdotally a little bit on Mexico, Colombia and some of these other Latin American countries as compared to the United States. Even if you're with a legacy bank such as bank of America like myself, you don't need to go to physical branches and you're not waiting in line for two hours to get a customer service or deposit or money transfer or what have you. But whenever you're traveling in one of these countries, Mexico, Colombia, what have you, if you're going up to an atm, it might be next to a banking branch and you see lines out the door of people waiting, you know, 10, a 10 person deep line of someone waiting an hour to get a simple customer service done. If that can all be done through the new bank app now and you don't you just need to disregard all that? You can get direct deposit to the new bank app. You have a high yield savings account. That value proposition is so much wider versus the legacy players, as opposed to, say, a SOFI in the United States versus a Chase or bank of America. That's why the new banks and Mercado Pagos, at least from my perspective, seem to be growing so quickly as they just crushed it on what the value proposition is versus these legacy players.
- [15:44]
Dave Ahern
Yeah. And to throw another log on that fire. Well, the last time I was in Brazil with my wife, she wanted to open a savings account because she wanted to transfer money from the US to there to save money because we might retire there someday. It took her three hours to open a savings account, and she was the only person in the bank. It was ridiculous. It was like. It was. I, I was, I was beyond irritated. Like, why don't you just do it? No bank.
- [16:10]
Brett Schaefer
Yeah, just. Let's, let's, let's do this all on the phone next time. And they probably have a higher, higher yield on. On the savings account.
- [16:18]
Dave Ahern
Yeah, for sure.
- [16:19]
Brett Schaefer
Yeah. All right. Today they're in. And I'm going to roughly get these populations right. Brazil, Mexico, two largest economies in Latin America to, I think, think largest populations. Brazil is like close to the United States, 250 million. Mexico, I think, is about 130 million. Then they're in Colombia. Smaller economy, smaller population, but still sizable. 55 million. But you have many other countries out there. You have the Central American countries. You have Argentina, Uruguay, Chile, Peru, Ecuador. What? And they've talked about expanding to new Latin American markets. What do you think? And have they said anything about specifically what markets they can enter? I don't want to steal your answer because I think I might know what it is, but what do you think of that? Maybe I can give my thoughts as well. Before we move on, we want to talk about our friends at Interactive Brokers. Interactive Brokers is our favorite brokerage platform. They make it easy to buy stocks, ETFs, options, futures, currencies, bonds, and more, all from a single unified platform. And Interactive Brokers allows you to maximize your returns by minimizing your costs. They offer zero commissions on U.S. stocks and low commissions on international securities. And they don't cut corners either. Interactive Brokers, one of a kind. Smart routing technology gets you the lowest price possible in 36 countries and 28 different currencies. Interactive Brokers is our home for stock trading. And we wouldn't go anywhere else if you're getting serious about investing. It's time to upgrade to a broker you can trust. Head on over to ibkr.com restrictions apply. Interactive Brokers is a member of SIPC.
- [18:00]
Sponsor/Ad Read Host
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- [19:05]
Dave Ahern
Yeah, the. I have seen some chatter about Argentina. They have talked a little bit about moving into Argentina and they had branch, not branches, they had offices in Argentina a few years ago and when things were really really bad they shut them down and, and kind of discontinued operations. But now that that Millie has seems to have gotten things a little more stable in Argentina and you could argue maybe are getting better. I don't want to get into the politics of it but just talking about the economy of the company, of the country, it looks like things are starting to turn around and so you are start. They have been talking about going back to Argentina as potentially the next opportunity to, to, to, to go into the challenge will be of course that that is Mercado Libre's home base and that will be a much bigger uphill battle than it will be in some of the other places they've gone into simply for the fact that most of the other countries are all sitting on legacy banks that don't have much digital presence. And so Mercado Libre certainly does have a digital presence and I think will offer a stiffer challenge in Argentina. So that's as far as Latin America goes. That's, that's what I've heard. I'm curious if you've heard anything different.
- [20:31]
Brett Schaefer
I haven't heard anything Different. I've probably just seen the same speculation. I would think given the hyperinflation's kind of going away and you have the at least somewhat long term, multi year like not commitment. But Malay is going to be there for at least two to three years I think until his, the next election comes up. You think they'd make the bet going forward, but you got to get regulations. I think my question for you would be as a whole, if we look out 10 to 20 years, is there any reason they're not in every Latin American market except maybe of course excluding a Venezuela if they have a right, you know, kind of a failed state.
- [21:13]
Dave Ahern
Yeah, right. I don't see any, I don't see any particular reason on the horizon that would prevent them from being in every Latin American country at some point in the future. I think because of the nature of how they do business and also the nature of the economies, the where the economies are in those parts of the world and also the digital nature, nature of what it is that Nubank does, I don't see any reason why they wouldn't expand to those at some point. I will say this, that although Nubank is considered a, a disruptor and is very, you know, it's growing very fast, they also, if you look at the core of the business and who's running the company, they have a fairly conservative viewpoint on how they expand and things that they do. They're not just throwing money at, at things, just to throw money at things. They're very, they've been, so far they've been very deliberate about the things that they do and they test the waters, see if things do well and then they, then they just kind of press on with those particular things. They don't just oh, you know, hey, we're the leader, we're just going to start throwing money and expanding just cuz they seem to be very prudent in their capital allocation and just their, their ideas of how they expand. They just, they, they're, they take their time. So that's one of the things I like about them.
- [22:38]
Brett Schaefer
Okay, that leads right into the next question. This was a slight surprise when people saw this. Why have they applied for a US banking license? @ first I kind of was taken aback because I thought oh, are they going to start to directly compete with bank of America and Chase? That might be difficult. But I kind of pulled myself back and said okay, it might given like the, the remittance stuff and all the other, all that, that good stuff. Why did they apply for a U.S. license and how does it make sense for a comedy that's focused on Mexico.
- [23:09]
Dave Ahern
Brazil and Colombia because of the growing Latin population in the United States? I mean, you know, it made perfect sense to me. I, I saw, I said when I saw the news, I saw all the commentary at first and I think, I think the first in heat of the moment commentary was all based around really, you're going to try to compete against JP Morgan and Citibank and US Bank? Are you nuts? And I don't think they are. I think they're literally just going after the Hispanic population here in the United States, which makes complete and utter sense. The majority of people that immigrate to the United States and without getting into the politics of it again, the majority of the people are coming from Spanish speaking countries, whether it's Mexico, Colombia, Ecuador, Nicaragua, any of those places, they're all coming from there to come to the United States. And it makes perfect sense to allow nubank to operate here in the United States. And if I was a Latin American citizen, I would want to have the opportunity to use nubank as a bank here in the US and to your point, think about how easy it would be if you have a bank here and you want to transfer money to your family that are also a new bank and let's say they're in some small city in Colombia, you know, that just became 10,000 times easier to do. Not that remitly or wise are not hard.
- [24:30]
Brett Schaefer
But I was going to say that I know that the more I thought about it, the more I thought, hey, this could be a long term bear case to remitly. But nubank, if you're listening, maybe just acquire remitly at double the current.
- [24:43]
Dave Ahern
Exactly. They haven't really been an acquirer per se along the way and maybe they will be at some point to utilize some of that stuff. But it just makes sense to with such a large, potentially unbanked Latin population in the United States, especially in the southeast, California, Arizona, New Mexico, it would make complete perfect sense for them to have a banking license here to allow that. And who knows, in the future maybe they could take on some of those companies. But I really don't think that that's the goal.
- [25:18]
Brett Schaefer
Right. It almost be a second bank account or targeting again, maybe the 10 million or so wealthiest Latin American people that are living in the United States. Let's talk about some of the other growth opportunities, including their expansion beyond financial services. This is something that's flying under the radar. I think for them they are building what I would say would be similar ish to American Express services as kind of a comprehensive benefit bundle for some of their wealthier customers. I guess this kind of relates to the two questions I have. You know, the Ultraviolet card targeting wealthier customers and expanding beyond financial services and offering all sorts of benefits for people that either bank with nubank or are using their premium credit card.
- [26:12]
Dave Ahern
Yeah, the, the Ultra Violetta card. When I was reading about it, when I was doing my write up, I'm like, this sounds like American Express. I mean it's, you know, It's a black MasterCard. It's made of metal.
- [26:24]
Brett Schaefer
Not a bad company to copy. No, not at all.
- [26:27]
Dave Ahern
Not at all. No, no, not at all. I mean it just reeked of American Express. It's, it's all the same kinds of things. You know, you, you do have to pay an annual fee, but you get, you know, extended benefits for that. You get, you get lower interest rates, you get better interest rates on, on your savings accounts, you get investment offerings. You know, if you have a certain balance, you know, these things are, you know, you get the, the, the, the lounge service that you get for American Express. You know, if you travel at all, you know, if you fly Delta and you travel at all and you have an AMEX card, you know, it sounds like that's the way to go. So all these things are already being offered.
- [27:05]
Brett Schaefer
I think they built a new bank lounge in one of the big, either Sao Paulo or Rio. They built like a giant one just for new bank customers.
- [27:14]
Dave Ahern
Yeah, I, I saw it. I think it was in there. If I remember right. It was kind of a blur, but I think it was in the Rio one in their airport, they huge one. So yeah, it's, it's, you know, it, it's been a huge d draw for these people. So, you know, 70% of their customers that are higher income are already on the platform, but it's not always been their primary platform. And so they're, they're using this card as a way to try to draw more of the wealthy people's income and, and more importantly their investments to the nubank platform, which will benefit Nubank, of course, but it also entices people to use nubank as their primary bank and they're using the Ultra Violetta card as a way of, you know, come to me, come hither kind of thing.
- [28:04]
Brett Schaefer
So it's almost a combination of American Express and Discover, I would say because they're using some like they're going to convince all these wealthy people to deposit with them, but then they can use that to start these credit loans with the people, the underbanked population, right?
- [28:18]
Dave Ahern
Yeah, yeah, for sure. And I think one of the things that metric that new bank talks a lot about is called rpac. So average revenue per average customer and their normal rate is around $12, a little over $12 for the, the wealthier customers, that goes up to 45amonth. So the more people that they contract the wealth, the better their profit margins are going to be and the better their returns on equity are. And it just makes the company a lot more profit because this is just a far more valuable customer that they can entice because up until now they've been going for more of the unbanked, which generally corresponds to middle class to below. And so that's one of the things that they're doing. So I guess the other services that they're offering are things like insurance, buy now, pay later investments. They've also been branching out into small to medium sized business banking and they're also offering like the premium tiers. But the business banking is the one that I, that I'm kind of intrigued by. When I was in the last few times that I've been to Brazil, I've seen a lot of competitors, not credit cards, but a lot of their payment options. So companies like Stone, POS to Curl, Mercado Pago, all those people offer these, you know, in essence what we think of these little dongles, right? It wasn't unusual to go to some place and see somebody selling something on a street. And when you went to buy it, they use their iPhone or their Samsung phone to make the payment. And a lot of those were being done through a company like Stone or a pog, Seguro, and Nubank is starting to go after those customers so starting to offer those services. So if you bank with Nubank bank and you have a small business account, when you make a transaction, your money goes directly into your new bank account. You can have a business account with new bank and if you bank with them personally, that just gives you all kinds of options as a business owner to be able to do things like get a loan for your business at some point or do other things, get insurance for employees. You know, all these things that you may not necessarily always have or have to have separate services or separate offerings to go to different businesses to get all those things. And if you could do all that as under one place, as a business owner, somebody who's not been a business owner but has done a lot of that, I can tell you it's, it's a godsend if you can just do it with one vendor as opposed to having seven. So those are, those are some of the things that I've been, that I've seen that, that Nubank is doing. These are smaller parts of their business at this point, but these are things that as I mentioned earlier, they're, they're putting their foot in and they're seeing how these things are going to go. And, and as they, you will start to see them put more emphasis on, on these particular parts of the business.
- [31:16]
Brett Schaefer
I almost think of those as customer retention tools. I'm going to compare them to American Express today for myself. Or you can use Sofi as an example where you know, I have the high Yield Savings account on American Express now. It offers a very, very strong rate and that's gonna, you just kind of get the friction and the lethargy of getting locked in there where if someone's not offering a better rate, you're not going to switch. You can get direct deposit, all of that, all that good stuff. We're gonna close out with a few questions that we like to ask about every company. I'll talk about or ask about management first. Ryan and I put New bank on one of the, we did like a list or sort of trying to rank, you know, different upcoming founder led companies. You know, we have the coupons, the remit lease, the Airbnbs in the world in our orbit. But we put New bank on there as well. Well then we own it. But they are a founder led company. What do you think about their David Velez and the executive team that he's built at Nubank?
- [32:18]
Dave Ahern
I think they're exemplary. The more that I read about them, the more that I like them. They started the business for a good reason. They saw an opportunity to help the people of Brazil in particular discover have access to banking. They saw through a frustrating transaction. David Velez saw that there was an opportunity and there was an injustice being done. The, the legacy banks basically didn't give two craps about the citizens of Brazil and were rude and were hostile and hard to work with kind of on purpose. And so he took the exact opposite approach and decided he was going to do something about this and he's done it. And the other thing that I like about him is, you know, when you read, when you read about different management teams, it always makes you feel a little bit like what have I done with my life? Because they see, you know, they have all these accomplishments. But what's even more impressive about David Velez is, I think he's only 46, so he's still really young and he has a long ways to go with the company and what he's doing. Another thing that I like about him is that a few years ago he, he was offered by the board of directors a $300 million pay package and he turned it down. Down. He said that I have enough money and let's put that money into the employees and into the bank to make the bank better for the customers and for the employees and Anti Elon. Yeah, exactly.
- [33:44]
Brett Schaefer
Right. Yeah, right. The opposite motivation. Yeah. That's such a fantastic anecdote of. All right, this guy not only is going to take care of shareholders and focus on shareholder value, but he's going to take care of his employees first as opposed to getting paid himself.
- [34:02]
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- [35:08]
Dave Ahern
Yeah, yeah, exactly. And if you look at the, if you look at the capital allocation of the company, if you look at their returns on equity, for example, they have just skyrocketed over the years. And that is an indication that they know what they're doing. They're doing, they're doing a good job. They're growing really fast, there's no question about that. But they're doing it to me, they're doing it prudently and they're doing it judiciously as opposed to just throwing everything at the wall. And they're trying to be, I guess, cognizant of the shareholders as well as the customers as well, basically the stakeholders of the business. So that's another thing that I look at. And then the last thing that I look at as far as like how the management is doing is that they, they have growth plans, they're open and honest about what they're doing. And there's been some times where they haven't done things well. And when you listen to earnings calls, management doesn't hide from it. And they, they will say, yes, we didn't do this well, we didn't, you know, they won't say we messed up, but we didn't do this well. We're going to learn from this. And then they improve. And then the next time this situation comes up, it's not the same result. And so that to me is also an indication that they know what they're do, they know what they know. And if they don't know something, they figure it out. And then the last thing I'll throw out there is they have a net promoter score of 84. And that tells me that they care about taking care of their customers. And in this day and age, that's such a rare thing. And especially in the banking industry, that's really a rare thing. And so the fact that they can have that indicates to me that they're building a culture that, that cares about their customers. And I think that will go a long, long ways to the company being successful for a long time, even after David Velez leaves.
- [36:57]
Brett Schaefer
Okay, let's talk valuation. Stocks pretty close or at an all time high? We're about $16 a share as a recording $77 billion market cap. Is the stock cheap? How do you think about valuation? What do you think, say over the next three to five years, what's their earnings trajectory, ballpark? We're not giving an exact price target or anything. That's not how you invest. But, but how are you thinking about the valuation over the next few years?
- [37:23]
Dave Ahern
You know, based on. When I run a valuation for a company, generally I like to use a dcf, but with a bank, that's not exactly the easiest thing to do. So I ran it through an excess return model, which basically models a company's growth of their equity compared to their earnings. And right now the company is growing earnings around 40% a year and they're growing their shareholder equity around a similar amount. I modeled the company around 20% because I thought 40% is while it's great, while it's happening. Is that realistic to project especially as Mexico and Colombia become bigger and bigger shares of the business? So I modeled around 20% and that gave me a fair value of around 20 bucks a share. And that's five years out. And so I think that is more than adequate. So I think if the company can grow 10 to 15% earnings over the next five to 10 years, we're all going to enjoy very much the result that the company's going to get.
- [38:26]
Brett Schaefer
And for listeners, that's not saying the stock is going to be at $20 in five years. It's saying the fair value is $20 today, discounted from five years back. So undiscounted we could see 25, $30 a share. If those projections are okay, which you know, a double over a three to five year period. Well, it's not going to be as good as the returns for, for people that were buying at $5 in 2022 when the stock was significantly cheaper than it is now. Well, I mean that's, that's still very acceptable result especially with the S&P 500 trading at 30 plus times PE ratio with not nearly the amount of growth. We've been optimistic about Nubank. I'll say I don't own the stock, but it's on my watch list. I love, I'd love to own it, but for you, Dave, someone that I believe is, maybe, correct me if I'm wrong, one of your largest positions. What keeps you up at night in regard to New Bank? What is one risks or multiple risks? You can go through any however many you want that you are thinking about with New bank that you're tracking as an investor.
- [39:30]
Dave Ahern
There are probably three things that I, I keep on my list, if you will, of things that I worry about. I. None of these keep me up at night, but they are certainly things that I keep my eye on. Number one is the political situation in Latin America. The political stability of Latin America is medium at best. There is lots of upheaval constantly. Brazil is a, it's a democratic company, a country just like most of the countries are in Latin America. But the last election was very contentious, similar to what happened in the United States. And the current administration is not exactly business friendly per se and they haven't done anything outright to try to harm New bank and their business. But it is something that I worry about because they have a history in the past of, of doing that to other businesses. And the political situation there, you know, makes me a little nervous. Same applies to Argentina. Same applies to Colombia and Mexico and the rest of the country. So without casting, you know, an aspersion on either party, it's just something that you have to be cognizant of because those regimes will, could raise interest rates and those would, raising interest rates would, you know, or lowering them could be, you know, beneficial or harmful to new banks. So you have to be aware of that. The other part of it is the credit risk because the countries are, are newer, their economies are, are growing and, but they're also a little more unstable than what we're used to here in the United States. And so the, the fluctuations that they could go through there could be a lot larger. So something that I watch is the 50 to 90 day NPLs or non performing loans to see how those do on a shorter term basis. And at the 90 day plus NPLs, and those are the ones that are, are in default. And, and how are those, you know, most of the time when they go into 90 day plus default, that means that Nubank in reality has probably lost the vast majority of whatever it is they loaned that particular person.
- [41:44]
Brett Schaefer
Right? And those have ticked up a little slightly over the last couple years, right?
- [41:49]
Dave Ahern
They have, they have. So I read, I read a report from a gentleman named Karen who's a really smart dude. He, he writes for Multi Bagger Nuggets for Chris at Multi Bagger Nuggets and he did a, he's a, he's a banker. I'm not sure where he banks, but he's a banker. And I read a report that he did a while back and he said the, that you. For new bank. If the, if the 90 day plus NPL gets above 7 and a half to 8%, that's when you need to worry. But if it's under there and it fluctuates under there, he said that's, that's a fairly decent, that's an okay rate to look at. So that's, those are the two things that I look at and the other one that I look at is the, the spread between the RPAC and the cost to serve. That is a real, real great way to measure the profitability of what Nubank is doing. And according to the last report like Brett was mentioning at the beginning of the show, theirs is around 12, a little over $12 and their cost of servers around around 80 cents and that's per customer. So the bigger the spray, isn't that kind of nuts? I think I would kill for that. But so you know, when you see that kind of thing, that tells me that they're doing a really good job of underwriting and being disciplined and generating revenue from each customer. And as you look at each tranche, as the longer people bank with with new bank, the higher that goes. And so that is something that I watch every quarter to make sure that it's kind of remaining steady or, or expanding. And that's a great way to measure profitability. So those are the three things that I kind of look at when I'm.
- [43:21]
Brett Schaefer
Thinking about new banks and to add on to. And again, it's not we're speaking strictly from an investing standpoint from any of the political situations. I'm not going to pretend to be an expert on these countries if anyone's listening from these countries, but from reading our friend Ian's Bizek from Ian's Insider Corner, who will actually going to be having on in November, which is pretty fairly close to when this episode will be coming out to discuss Latin American countries including Argentina and how the broad macroeconomic situations look. He and I would say I agree with him and Brazil might be unfortunately the exception here with where new break on brings but if you look at Argentina now you look at Chile and Colombia and you look at Mexico, there are much more pro business, pro capitalists coming in or potentially going to come in over the next few years that could be helpful for nubank. Now that's guaranteed to happen. And as Dave said, it could flip on a dime as, as things tend to do sometimes politically. But there might be some optimism and some tailwinds politically and macroeconomically for nubank over the next few years that could help them in Colombia, Chile, Argentina and maybe some new markets that they enter.
- [44:43]
Dave Ahern
Yeah, absolutely. Those are, those are all, all fantastic points. And if you're interested in this company and learning about it, obviously go read the primary resources. But some other people that are really, really smart and have actually taught me a lot about the company that I would highly recommend people follow would be Fetty Sandler. He was investor relations for Nubank and actually helped take them public. So he's a smart cookie. Brad Freeman, who writes a stock market nerd. He has been very bullish on the company, has written quite a bit about them as well. And also recommend the Wolf of Harcourt. He is a Irish investor, I believe and he's really very active on Twitter and he's written a lot about New bank and he also owns the company and he's very knowledgeable as well.
- [45:27]
Brett Schaefer
Okay, that's all the questions I have on New Bank. We had a little bit of time so as an additional question, Dave, what are the type of things, topics, investing topics you guys are covering at Investing for Beginners and Value Spotlight lately or upcoming?
- [45:45]
Dave Ahern
Yeah, I think the. That's a great question. The areas that I guess I'm most curious about and I think have potentially the biggest opportunities right now would be obviously fintech financials are in my wheelhouse, so that would include things like insurance and fintechs and banks and things of that nature. But I'm also super interested in the semiconductor space. And as the AI thing continues to evolve, there's no question that there's going to be a few hundred billion dollars spent. And so there could be opportunities for some from good returns from companies not named Nvidia. So there's a lot of opportunity there, I think. And then the other space is the energy space. And I'm not talking about oil. That's definitely in my too hard pile. But if you look at the other aspects of energy. And again, I'm not talking about the. Was. What was the stuff you were talking about? The.
- [46:48]
Brett Schaefer
Oh, the nuclear power.
- [46:49]
Dave Ahern
Yeah, nuclear power. I'm not talking about scale power.
- [46:52]
Brett Schaefer
$20 million. No revenue. Yeah. Maybe exclude those.
- [46:55]
Dave Ahern
Yeah, no, no, those will be excluded. But you know, there are a lot of opportunities in potentially in utilities. There are a lot of opportunities in companies like Brookfield Asset Management, who buys a lot of electric, a lot of electric generation. There could be opportunities in companies like Amphenol and Eaton, who are not necessarily directly related to power per se, but they certainly have an impact on what happens with data centers. And then there's companies like Berkshire Hathaway Energy, which is hidden within Berkshire, is one of the largest clean energy producers in the United States. A lot of people don't know that. So there's a lot of opportunities in those spaces. And that's what I've been trying to do to learn more about and see where the opportunities could lie.
- [47:43]
Brett Schaefer
All right, thank you, Dave, for joining the show. For any listener, check out the Investing for Beginners podcast or Value Spotlight. We'll have some links in the show notes, but you can find them by searching on Spotify, Apple, YouTube, or just searching on Google. I am sure it will pop up for you. Thank you for everyone for listening to this episode. As a disclosure, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan I or any podcast guests may hold securities discussed in this podcast, may have held them in the past and may buy, sell or hold them in the future. Thank you everyone for tuning in once again. We have some great interviews coming up and we have some great discussions we're going to be doing. And I'm trying to time this out because we're pre recording it. We have a super investor we're going to be studying Chris Hone. We're going to have some more stock research report episodes that I don't want to spoil. And we're going to have that interview I mentioned earlier with Ian Bezos deck discussing more Latin American stocks. So again, Dave, thank you. And we'll see everyone next time.