1 Magnificent Fintech Stock Up 230% to Buy and Hold Forever

Great businesses rarely go on sale. That's especially important to keep in mind as markets test all-time highs. If you want to buy high-quality businesses that can grow rapidly over time, you'll usually have to pay a premium to do so. This reality scares off many investors. But don't let it deter you from investing in this future blue chip stock that has already skyrocketed in value by 230% since its all-time low in 2022.

Follow Warren Buffett and buy great businesses like this

Warren Buffett has often advised investors to buy into businesses that are so strong that even a weak management team can succeed. In the case of Nu Holdings (NYSE: NU), not only is the business one of the strongest I've seen in recent years, it arguably has one of the best management teams in the space. It's a rare win-win from an investment standpoint. The only issue is the company's premium valuation. But as we'll see, this shouldn't be a red flag for savvy investors.

What makes Nu one of the best businesses I've looked at in recent years? At its core, Nu is a fintech business. This category has generated some of the fastest-growing stocks on the market. That's because the financial sector is huge, and applying a technological approach to that sector can unlock rapid adoption and impressive economics.

Nu is a prime example of this. The company operates solely in a handful of Latin American markets: Brazil, Colombia, and Mexico. The Latin American banking industry in general has traditionally been controlled by small groups of concentrated incumbents. Partly due to this industry consolidation, and partly due to the required expenses of maintaining thousands of physical bank branches, banking fees were relatively high in these countries, even for basic services. Nu observed this dynamic, and entered the market with a novel strategy: All of its financial services are available directly from a smartphone.

Without any physical branches, Nu was able to keep its costs lower than the competition. And because its services were offered directly to customers in the comfort of their own homes, Nu was able to circumvent existing incumbents, innovating at a far faster rate than the competition. Its crypto trading platform, for instance, surpassed 1 million users in its first month of operation. This was achieved at a time when very few of its competitors were even thinking about entering the crypto markets.

Over the last decade, Nu has gone from a complete start-up with very few customers to more than 100 million customers across three countries. With its proven model for growth, the company is primed to enter even more new markets. Keep in mind that Latin America has more than 650 million total residents. While new markets won't be as lucrative as Nu's initial markets, there's clearly still a long runway for growth.

This growth runway is too exciting to ignore, even for Warren Buffett. He bought more than $1 billion Nu shares several years ago. So far, he hasn't sold a single share, even as the stock price has soared since setting all-time lows in 2022.

What's not to like with this story? One thing: The valuation. But as we'll see, the valuation isn't nearly as pricey as it seems.

NU data by YCharts.

Is Nu Holdings stock too expensive? The answer might surprise you

Good businesses rarely go on sale, and that's true for Nu. Shares did sell off shortly after its IPO in 2021. But after hitting those lows, it's been nothing but an upward ride. Now trading at 7.5 times sales, Nu appears to be a very expensive bank stock. But remember: Nu is a fintech business, not a traditional bank. That reality is checked by looking at its expected sales growth for this fiscal year, which stands at an impressive 107%. Bank of America, in comparison, is expected to grow sales by just 3.4%. Even SoFi Technologies, another fintech business, is expected to grow revenue by just 21%. Nu is clearly a growth machine.

But there's another reason why Nu isn't as expensive as first appearances suggest. Recently, the company became profitable. Due to its fintech approach, which generates high profit margins and economies of scale, Nu's price-to-earnings ratio stands at just 33 times earnings -- only a slight premium to the S&P 500. On a forward basis -- that is, based on what analysts expect the company to earn next year -- shares trade at just 27.5 times forward earnings. That's not bad for a company growing sales by triple digits that has just begun to ramp up its profitability.

NU PS Ratio data by YCharts. PS = price-to-sales.

Nu is a high-quality business trading at a reasonable valuation. It also happens to be backed by some of the best investors in the world, like Warren Buffett. Shares experienced a rare dip recently, and this could be a great time to load up on this future blue chip stock.

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See 3 “Double Down” stocks »

*Stock Advisor returns as of December 2, 2024

Bank of America is an advertising partner of Motley Fool Money. Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.