First Comes Investors, Next Comes Clients

Nubank's IPO is a success but many analysts believe the bank's stock is overvalued.

In December, digital bank Nubank began trading on the New York Stock Exchange with a $52 billion market capitalization, more than that of Itau Unibanco ($37 billion) and other well-established Latin American financial institutions. The high market valuation suggests investors expect strong growth from the company in coming years.

Are they likely to get that growth? The online institution must grow its client base massively, and  such an expansion remains uncertain, according to Fausto Ferraz de Arruda, CEO and founder of business consultancy XSFERA. “Certainly, they have done everything correctly so far, like diversifying the portfolio, internationalization through Mexico and Colombia, and now the IPO,” says Arruda, who knows the operation closely.

Most banking analysts argue that the valuation was overpriced. Nubank must now try to meet investors’ expectations for quickly growing its client base, according to Arruda.

Buying shares might not be so advantageous in a scenario full of competitors, a possible recession and an annual 9.25% interest rate that might rise even further during the next set of of Central Bank Monetary Policy Council meetings.

Nubank debuted just eight years ago and became the third-most-valuable Brazilian company behind Petrobras and Vale, according to numbers from market-data provider Economatica. Nubank priced its offering at $9 per share in its initial offering. At the same time, it listed Brazilian depositary receipts on Brasil Bolsa Balco.

Nubank shares did well after their first trading sessions, but the company has yet to prove itself. The digital bank continues to accumulate deficits on its balance sheet, as approximately 70% of its clients are less than 40 years old, have low income and have expensed less than $100 on their credit cards.

“Nubank has the mission to attract higher-income clients and wait for the current young clients to achieve better income,” says Arruda. “As the bank has been following all the important steps to success, I believe it will perform well.”