Top Brazilian Fintech companies trading on US stock exchanges
Nubank, Banco Inter, Stone, PagSeguro and XP Inc.
Brazil looks like the place to be right now if you are in the Fintech business. Neobanks have reached the scale that you don't see in Europe and the US: Nubank has almost 60 million customers and Banco Inter is approaching the 20 million customers mark. Stone and PagSeguro are disrupting merchant acquiring and daily banking businesses in the SME segment. XP Inc. has built a profitable digital brokerage, and can probably teach folks at Robinhood a few lessons about building a Fintech company. Oh...and don't forget the Central Bank of Brazil, which launched PIX in 2020, a low-cost instant payment scheme, that is now used by more than half of Brazilians on a monthly basis.
Nubank, Banco Inter, Stone, PagSeguro, and XP are trading on US stock exchanges, so today I wanted to make a brief overview of these companies, as I believe they provide attractive opportunities for investors. Warren Buffett is invested in two of these companies, Nubank and Stone, so I guess I am not alone in my thinking.
Please note, that most Brazilian companies report in Brazilian Real, and the exchange rate of real is fluctuating heavily against the US Dollar (see the chart below). As of August 1, 2022, the exchange rate was 1 USD = 5.1765 BRL.
Source: Google Finance
Nubank | NU
Market capitalization: $19.63 billion
Revenue (2021): $1.7 billion
Net Income (2021): -$165.3 million
Adjusted Net Income (2021): $6.6 million
Founded in 2013, Nubank operates in Brazil, Mexico, and Colombia, and offers a full range of financial services for private individuals, such as current and savings accounts, payments, debit and credit cards, consumer lending, life insurance and securities trading. It also offers current accounts, as well as debit and credit cards for businesses. Needless to say, the services are offered via superior online and mobile experience and the company doesn’t rely on branches for serving its customers. Nubank went public in December 2021, and got lots of media attention by disclosing Warren Buffett’s Berkshire Hathaway among its shareholders.
The company went through explosive growth over the last year, growing its customer base from 37.1 million customers in Q1 2021 to 59.6 million customers in Q1 2022. Close to 80% of the company’s customers use its services on monthly basis; thus, the company boasted 46.5 million monthly active users in March, 2022. The company also reported $877 million in revenue in Q1 2022, which represented 258% YoY growth compared to Q1 2021, and 155% growth in its lending portfolio, which increased from $3.1 billion in Q1 2021 to $7.9 billion in Q1 2022.
Nubank is already serving “33% of the country’s adult population” in its home market, Brazil, thus, the company’s ability to scale in its new markets, Mexico and Colombia, is the key metric to watch going forward. At the end of Q1 2022, Nubank reported 2.1 million customers in Mexico and 0.2 million customers in Colombia.
Banco Inter | INTR
Market capitalization: $1.28 billion
Revenue (2021): R$3,189 million / $616.3 million
Net Income (2021): R$64.7 million / $12.5 million
Adjusted Net Income (2021): R$78.5 million / $15.2 million
Banco Inter is a great example of a traditional bank successfully transitioning to the digital-first strategy. Thus, founded in 1994 under the name Banco Intermedium, the company first focused on mortgage and payroll lending. In 2014 the company embraced a digital transformation journey, which culminated with its rebranding into Banco Inter. As of today, the company is offering a full suite of banking products, including accounts, payments, cards, lending, insurance, and securities trading. The company first went public in Brazil in 2018, and after reorganization and approval from its shareholders relisted on NASDAQ in June 2022.
The company is a smaller rival of Nubank, yet, it boasts quite impressive growth numbers. Thus, the company reported 18.6 million customers at the end of Q1 2022, which represented an 82% YoY growth from 10.2 million customers at the end of Q1 2022. The company’s revenue in Q1 2022 grew to R$1.2 billion (approx. $240 million at the current exchange rate), representing a 130% YoY growth. In January 2022 Banco Inter completed the acquisition of USEND, a Fintech company serving Brazilians living in the United States.
Banco Inter received a cold welcome on NASDAQ, with the company’s stock price down 8% since listing. However, listing on NASDAQ provides Banco Inter access to the largest capital market in the world, so it will be interesting to follow how the company puts that to use. After all, they have spent an enormous effort to implement this relisting, so I’d bet they have a plan for making the best out of it.
Stone | STNE
Market capitalization: $2.99 billion
Revenue (2021): R$4.8 billion / $0.93 billion
Net Loss (2021): -R$1,377.3 million / -$266.3 million
Adjusted Net Income (2021): R$203.3 million / $39.3 million
Founded in 2012, Stone’s core offering is payment acquiring services to small and medium-sized businesses in Brazil. In 2020, the company announced a merger with Lynx, a provider of integrated POS software solutions to merchants, so you can think of the combined company as the “Square of Brazil”, as it offers merchants of all sizes POS terminals, payment processing, and software solutions. The company went public on NASDAQ in October 2018, and similar to Nubank boasts Berkshire Hathaway among its shareholders.
In Q1 2022, the company reported R$ 2.1 billion in revenue ($400 million at the current exchange rate), which represented a 138% YoY growth compared to Q1 2021 (87% YoY growth excluding the impact of the Lynx merger). The company is also developing a digital banking offering for SMBs, and grew the banking customer base from 237K customers at the end of Q1 2021 to 510K customers at the end of Q1 2022. It should be noted that the company’s performance in 2021 was heavily impacted by its unsuccessful venture into the lending business. Thus, the default rates and the rising cost of capital (due to rising rates set by the Central Bank of Brazil) led to losses and the company decided to pause its lending operations in mid-2021. The management is eager to revisit the lending business in 2023.
As per the management comments, the company’s focus for 2022 is restoring profitability and recouping the losses from its lending operations. However, in the longer term, I would expect Stone to pursue again its lending aspirations, as it greatly enhances the value proposition for its customers.
PagSeguro | PAGS
Market capitalization: $3.56 billion
Revenue (2021): $R10.5 billion / $2.02 billion
Net Income (2021): R$1,166.3 million / $225.5 million
Adjusted EBITDA (2021): R$2,738.4 million / $529.4 million
Founded in 2006 by Universo Online (UOL), one of Brazil’s largest news portals, PagSeguro started by offering eCommerce acquiring services to merchants, but later expanded into mobile and offline payments. In 2019 the company also launched PagBank, a digital bank, offering a full set of banking services including accounts, payments, credit cards, and securities trading, for consumers and small businesses. The backing of its parent, UOL, allowed the company to become one of the largest merchant acquirers in the country, as well as build a sizeable customer base for its banking offering in record time. The company went public in January 2018.
The company reported R$3.4 billion ($662 million at the current exchange rate) in revenue for Q1 2022, which represented a 66% YoY growth compared to Q1 2021. PagBank grew its customer base 59% YoY from 14.8 million customers at the end of Q1 2021 to 23.5 million customers at the end of Q1 2022. 14.3 million PagBank’s customers are active and include 6.7 million merchants and 7.6 million consumers. Similar to StoneCo the company has been challenged by the rising cost of capital, yet it remained profitable in 2021, and the management guided for continued profitability in 2022.
PagBank’s revenue contribution is critical for the further growth of the company. In Q1 2022 PagBank’s revenue contributed less than 9% of the total revenue, as the merchant acquiring business remains the core source of revenue for the company. Needless to say that competing with Nubank and Banco Inter for banking customers will not be easy.
XP Inc. | XP
Market capitalization: $11.81 billion
Revenue (2021): R$12.1 billion / $2.33 billion
Net Income (2021): R$3,592 million / $694.4 million
Adjusted EBITDA (2021): R$4,848 million / $937.2 million
XP Inc was founded in 2001 by Guilherme Benchimol and Marcelo Maisonnave and went public on December 11, 2019. XP Inc positions itself as “a leading, technology-driven platform and a trusted provider of low-fee financial products and services in Brazil”. The company’s platform provides low-commission trading in equities, fixed-income, investment funds, and other investment products. You can think of it as a Charles Schwab of Brazil, as the company offers a wide range of investment services ranging from trading to advisory to securities placements for corporations.
During the last two years since the company went public, the number of active customers grew from 1.7 million (Q4 2019) to 3.4 million (Q4 2021), and Assets Under Custody grew from R$409 billion (approximately $87 billion) to R$815 billion (approximately $173 billion at the current exchange rate). The company is also highly profitable and earned R$3.6 billion ($0.7 billion) in Net Income on the Total Revenue of R$12.1 billion ($2.3 billion) in 2021. The company is also developing auxiliary products to increase the monetization of its customer base (insurance, pension funds, credit cards, etc.).
XP’s profitability wasn’t left unnoticed and naturally attracted competition. Therefore, competition with Nubank, which acquired XP Inc.’s competitor, Easynvest, and now has a pile of cash sitting on the balance sheet from the IPO, as well as Banco Inter, which now has access to public markets via its listing on NASDAQ, will be an interesting dynamic to watch and will test XP’s ability to compete.
XP will report Q2 2022 results on August 9, 2022, Nubank and Banco Inter will report on August 15, 2022, and StoneCo and PagSeguro have not yet set the reporting dates.
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Source of information: Investor Relations websites of the respective companies
Disclosure & Disclaimer: despite rocky performance in 2021 and early 2022, I have open positions in most of the companies covered in this newsletter, as I am extremely bullish on the transformation in the financial services industry. However, none of the above is financial advice, and you should do your research.