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By The Motley Fool

Warren Buffett's Berkshire Hathaway owns one of the world's most closely followed stock portfolios. Berkshire's top holdings are Apple, Bank of America, American Express, and Coca-Cola, but investors sometimes gloss over the smaller positions that might have more growth potential than those blue chip behemoths.

One of those oft-overlooked stocks is Nu Holdings (NU), a Brazilian digital bank that accounts for just 0.3% of Berkshire's portfolio. Berkshire currently holds 107.1 million shares of Nu, which gives it a 2.3% stake in the company, and that investment might go parabolic in 2024 for a few simple reasons.

What does Nu Holdings do?

Nu is an online-only bank that operates in Brazil, Mexico, and Colombia. It served 93.9 million customers at the end of 2023, compared to 54 million customers just two years ago, and is now the fifth-largest financial institution in Latin America.

Nu initially only provided digital checking and savings accounts, but it subsequently expanded its fintech ecosystem by rolling out credit cards, payment services, business loans, investment tools, and insurance services. That platform is sticky: Its average customer has already signed up for at least four of those offerings.

How fast is Nu growing?

Nu's revenue soared 168% (on a constant currency basis) in 2022 and jumped 63% in 2023. Here's how rapidly it expanded its customer base and increased its monthly average revenue per active customer (ARPAC) over the past year.

Analysts expect Nu's revenue to rise 38% in 2024 and 25% in 2025. Those growth rates should be driven by its expansion into more Latin American markets, its cross-sales of additional services to its existing customers, and climbing interest rates.

But unlike many smaller online banks or fintech companies, Nu isn't sacrificing its margins to gain new customers. In fact, its monthly average cost to serve each active customer actually declined 11% in 2022 and stayed flat in 2023. As a result, its gross margin expanded over the past year while rising rates boosted its net interest margin.

As a result. Nu's adjusted net income surged 2,858% (on a constant currency basis) in 2022 and 469% in 2023. Analysts expect its adjusted EPS to increase by 60% in 2024 and 65% in 2025. Those are stunning growth rates for a stock that trades at 25 times forward earnings.

Why could Nu's stock skyrocket this year?

Nu's stock has rallied nearly 140% over the past 12 months, but it still looks surprisingly cheap relative to its growth rates. Concerns about inflation in Latin America, competition from e-commerce and fintech leaders like MercadoLibre, and the market's hesitancy to embrace growth stocks before interest rates decline all seem to be compressing its valuation.

But over the long term, Nu should still have plenty of room to run as internet penetration and income levels rise across Latin America. It could also lock in more unbanked individuals in the region as it enters less developed markets. If investors recognize those strengths, its stock could attract a stampede of bulls and go parabolic over the next 12 months.

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