Nu Holdings' Mexico Expansion Tests S-Curve Repetition Amid High Valuation and LatAm Risks

What happened

Nu Holdings has built a 60% adult reach in Brazil and is now targeting Mexico, where adoption hit 14% and ARPAC reached $12.5, aiming to replicate its growth trajectory. This move aligns with its strategic bet to scale Mexico into a second profit engine, as noted in the DeepValue report, which highlights Mexico's role in reducing Brazil concentration. However, the report cautions that Nu's current valuation of $17.52 already prices in 20-30% revenue CAGR and near-30% ROE, leaving modest upside and significant drawdown risk if expansion falters. Key risks include potential 90+ day NPLs exceeding 8-10% in new markets, ROE compression below 20%, and macro headwinds in Brazil and Mexico. Thus, investors are scrutinizing whether Nu's low-cost model and AI-driven underwriting can sustain profitability while navigating Mexico's higher delinquency expectations.

Implication

The Mexico expansion offers growth potential but amplifies risks; successful ARPAC growth and cost control could drive revenue diversification and support the bull case. However, failure to manage credit quality or achieve profitability in Mexico might trigger ROE declines and multiple compression, given the stock's premium pricing. Short-term, focus on quarterly updates for Mexico's ARPAC trends, NPL ratios, and efficiency metrics to gauge execution. Long-term, a pullback toward the $14 attractive entry level would better compensate for LatAm volatility and Nu's unsecured loan exposure. Overall, position sizing should remain conservative until clear evidence of sustainable Mexico profitability emerges.

Thesis delta

The news reinforces the existing thesis that Nu's valuation hinges on successful Mexico expansion, without altering the core 'WAIT' rating. It underscores the need for vigilant monitoring of ARPAC and credit metrics in Mexico over the next 6-12 months. No shift is indicated, but failure to meet growth targets could accelerate downside risks already priced into the bear scenario.