Yet Another Value Podcast 对 $NU 的判断变化

We are talking about N U, the ticker there is N U, and it's a really interesting conversation. This is a company that is very, very popular among FinTwit compounder types, and Evan lays out a really compelling reason why why.

You know, you've got a fintech that's grow ROE 30%, growing quickly, trading at a reasonable valuation, the the much better KPIs, founder-led. Like, he lays out a really good reason why, and we are going to have a really insightful conversation on the risks, on the risks to Nubank in particular, the risk of the financial sector in general, as you're just going We've got lots of parallels to Capital One in the '90s, to a bunch of other things.

So, if you haven't tried Tratta yet, you should, and one easy way to is go to tratta.com, t r a t a.com/ N U, and you will see a Tratta transcript from just a month or two ago that I actually read and used heavily when I was prepping and thinking about and getting ready for this call.

So, if you like N U, if you like this podcast, go to tratta.com/ N U, and you will see a free Tratta transcript that will show you why I like them so much.

I'm excited to talk about the stock today. Evan, the stock we're going to talk about today is it's pretty popular in FinTwit circles, I would say. When I was when I was prepping for this podcast I uh one of the first things I do now is I have it I I have my AI pull all the fun letters it can find from Fiscal AI's fun letter database and it was like, "Hey, there's 87 different write-ups of the this company."

But I think you you have a really interesting angle on it and you've done a lot of work and thought about the historical parallels. So anyway, the company is Nubank. The ticker there is NU and I will just toss it over to you. What is Nubank and why are they so interesting?

Yeah, so thank you again for having me and I'm excited to talk about the this company. We've owned and and been studying for I guess coming up on four years or so. So just as some background. So basically Nubank is a digital bank. It's one of the largest in the world. They have about 140 million customers as of the earnings report yesterday.

Their their by far their biggest market is Brazil. Although we'll we'll touch on Mexico and Colombia are coming up nicely.

It was it was started back in 2013 by three founders. The largest of which are the CEO is a gentleman named David Velez who's actually from Colombia. Grew up there and out of a frustration with opening a bank account in Sao Paulo in 2012. There was armed guards and bulletproof doors and all kinds of months of paperwork and so on. Out of that frustration came Nubank and basically the idea that he had at the time was branchless bank with mobile which was coming up in Brazil very quickly at the time. A zero fee credit card and basically most importantly a fanatical customer culture focused on NPS and and and really pleasing the customer in in many different ways.

Um and over the last uh 13 or so years, um we would argue the results have been absolutely staggering. They have about 60% of the adult population as total customers. Um the most of the uh referrals that they get about 80 to 90% are organic, so that the marketing costs are extremely low uh versus the the uh competitor incumbent banks.

And um most importantly, they are extremely efficient. So, uh we can get into it, but the efficiency ratios are about 20 compared to the the uh incumbent uh legacy banks, which are more in the in the 40 to 60%

and over the four or so years since we've been uh studying the company. Back then, it was it was barely profitable, and now the company's extremely profitable. So, because of the operating leverage, which we'll get into, um the ROEs are now um again, as of yesterday, around 30 uh in the mid-30s or so.

So, um and then just to bring it forward, um I would say particularly this year uh earlier in the year, there was um some macro concerns, some credit concerns, and some transitions that the business has gone through uh that caused a a very significant decline in the stock price um and and um which was why we think it's particularly timely uh to discuss the this uh company today.

No, look, great overview. Uh I I am laughing because you said the the founder, he goes tries to open one of the reasons he goes he starts this he tries to open a bank account in Colombia and there's armed guards and all this paperwork and like Look, I am one I am one for efficiency, and whenever there's something inefficient, I hate it and I want to fix it. But, you know, this is just me, a mere mortal, not a man who started a multi-billion dollar banking uh startup that's like taking over all of Latin America.

But, when when I go out, I'm like, "Oh, there's armed guards are part of the problems." I'm like, "Okay, I'm I'm not touching that, right?" But, this guy starts it.

Uh okay. So, lots to touch on there and lots that we will touch on, but I guess to start, let's just frame it high-level. You know, the market's a competitive place, and this is a finance startup, right? They give lots of details. I believe I was reading I I think it was a article that said, "Hey, this is the company that gives actually out of all the fintechs I've ever followed, this is the company that gives the most disclosure on uh just all sorts of different KPIs and everything, right?"

So, this is a company that gives a lot of disclosures. As I mentioned, you know, like 70 fund letters that are mentioning this is a top holding, very visible, big company now.

What are you and then I suppose the other funds, what are you seeing that you think the market is missing that makes this an alpha opportunity? Yeah, it's a great question. So, again, to your point, there are all kinds of analysts on the sell side and buy side covering the name. I I would say still, even though that is the case, I think we still meet quite a few investors out there who are unfamiliar or sort of categorize it as like a EM, you know, sort of more early stage, not as profitable, however you want to say, risky bank.

So, again, acknowledging that it's definitely become more known over the years. Now, 70 whatever billion market cap, but it's still, in our opinion, not maybe understood. But I would say to answer your question most importantly is the view that we have over the long term. So, I would say that there's a view out there aside from the sort of the short-term noise that the company as I said has already gotten 60% of the customers or sorry, 60% of the population of Brazil. And so, obviously, that you know, you're you're getting to the point of, you know, maturity there in terms of, you know, how many customers you can get.

And I think that the market is missing that while they've spent the last say 5 years getting those customers, they're going to spend the next five sort of deepening those relationships. And again, we can get into this, but basically, there's a whole maturing of the those customers over time. And if you sort of run those numbers out in Brazil alone, you come up with a far more profitable enterprise. So, that's part of it.

And then the other part is Mexico, which I think correctly so the market has been extremely skeptical of although until recently, that that business has the potential in our opinion to be a similar size if not bigger than Mexico over time.

And they mentioned yesterday on the call that for instance, it's sort of benchmarked back to 2020 where Brazil was at that point in time. The the the revenue per customer the what they call the ARPAC per month is is double where it was at the same time in Brazil.

So, you have that and then we we can get into Colombia which is obviously smaller and then I'm sure at some point we'll touch on the the US opportunity. But, um yeah, I would say to summarize again our our view we're taking the sort of 10-year view where maybe many of these other folks are are not taking the same time horizon kind of look

So, let me pull on to a few points there, right? And I want people to keep in mind the the deepening of the customer relationship point that you said. You know, look banking Robinhood all these things, you get the customer relationship and this is why they give you you know, if you get one of those emails, "Hey, sign up for this credit card and we'll give you $150." or do a direct deposit we'll get 200. The relationships tend to be very sticky and that's their customer acquisition cost they plan on making back.

So, as you said they've grown a lot quickly and I I think they're hoping, "Hey, we spent to grow and all these customers we're going to get them." You know, they took the credit card we'll get the bank account whatever.

Uh your write-up so I just want people to keep that in mind. Your write-up and you know, anyone who's followed this company, there's a lot of parallels to the Capital One story in it. And I I think people point to that positively cuz Capital One has been a a good story in banking.

So, I I'd love for you to maybe go through the parallels and everything and then I'm going to follow up with some questions on kind of I think bare cases that could emerge from that. Yeah, sure. So, um I guess a few things there. Maybe it's it's uh helpful to give some background on on David if that's all right because I think it's a core part of the story David Velez and the and the co-founders.

So, as I mentioned David uh grew up in Colombia. He he had a very entrepreneurial background. His father uh I think started or or co-owned a a button factory as we understand the story where David worked in in quality control I believe checking the buttons. He apparently uh bought a I I think one cow and and grew the cow to six the herd of six cows before he he sold um the cow and or the cows I should say and went to Stanford. And I I won't bore you at this point with the rest of the story. But, the the The is that um uh he was he had a very entrepreneurial background when he was starting new banking 2013 or 2012 there about he brought in Sequoia was an investor in the seed round. I believe they invested $2 million and another big investor to your point about Capital One to close the loop here was QED the fintech firm in Nigel Morris who was a big backer of the company at the beginning and so at that point and and from then on a lot of folks from Capital One came were involved on the data science side on the board obviously the governance level but also more importantly in the operational side of things.

The parallels between the two companies are the or really as I say the focus on data science. So like Capital One they would start with a very credit card and a very low limit and huge reliance on data and and and having the algorithms and the models you know constantly updating and so on and so forth and obviously as the customer matured and and behaved that they would increase those limits. So I would say that that's really the genesis of of sort of where they came from and and sort of the the the similarities between the two organizations over time.

And the reason I think new bank is interesting is because Capital One killer stock the IPO in November of 1994 the stock is up like 13 x over the next 12 years right it it crushes the market. It's a great stock in 2001 I'm just kind of looking at my Bloomberg glancing at it. They're approaching 4 x price to book value all this sort of stuff, right? So this is a great growth company trading for a huge profitability and then what happens you know they they find this loophole but two things happen. You know, a lot of company uh a lot of the companies they're competing with cuz you're offering a financial product, they start doing balance transfers, too, right? Chase, all these guys. So, it gets a little bit more competitive. People start hiring the Capital One execs and saying, "Hey, come over here and bring that all that data science to us." So, the market's a little more competitive, and they kind of grow start taking so much of that market, they have to expand, right? They they buy a bank, they start doing deposits.

So, I I'm sure people can see where I'm going with it, but when I look at Nubank, I see this company, and 30% ROEs, great growth over the past few years, but say, "Hey, in Brazil, I I can't remember off the top of my head, but I think you're hitting like 60% of the population has a relationship with them, they're into the teens in terms of market share." And I can say, "Hey, that all sounds great, and let's put international aside for a second, but when I look at that, I say, "Hey, they're they're Capital One in 2006 at this point, right?" And the future is a lot slower growth, ROEs coming down, expanding into a lot. So, that's kind of my first worry when I I look at the story.

So, I I threw a lot out there. There, hopefully it was a fun little story and fun little trip down memory lane for anyone who remembers Capital One, but I I'd love to hear what you kind of think of that as the pushback.

Yeah, no, I I it's a fair pushback. And again, obviously, you know, our our thesis going forward does not rely on so many more customers, particularly in Brazil. Again, Mexico, US, and and Colombia are different stories, but I would say to sort of frame it up, I think we look at sort of the Brazilian profit pool,

and again, I'll somewhat answer your question by touching on Capital One, but I I'm not as deeply familiar with that business as I am with new. So, I'll sort of touch on it, try to answer your question, but the profit pool generally in Brazil is about a hundred billion dollars of gross profit in the banking system and and today new banks are at like 7% of that.

If you sort of look by by different product type, for instance, they just got into the payroll, which is actually the largest part of the credit business in Brazil, payroll loans, and they are now at like 1% of that, for instance. And so if you go down the different verticals, as I say, different product lines, not only in Brazil, but then the other countries, I I it's hard for us to see how how they don't grow materially from here, frankly.

Even and again, I'm sure we can get into it some some barring some downturns and and crises and so on. There there will be competition. There is and again, we can get into that, you know, from other fintechs. There's a few thousand, I think, fintechs in in in Brazil alone. So there are other players. I would argue that at the end of the day, Nubank has reached the point where they are they are they're so well known and that the brand and reputation is so strong that when they go into these other verticals, they distinct competitive advantage.

And then again, we can touch on the the data advantage that they have, but there is no question that obviously that they in some ways they've picked the lowest hanging fruit in Brazil, but our argument is that there's not only in Brazil, the other countries where they're just getting started, there's tremendous opportunity

and I I think that maybe most importantly on our thesis is David Velez and and the fact that he and his co-founder still control the company and own about 20% of the stock.

I think particularly in banking, as Munger used to say, I think you really need to trust the banker. Either the insurance company or the bank, you really need to have someone you can trust. And so him still being in his mid-40s and and controlling the company and and making sure that culture and growth is intact gives us tremendous comfort and optimism going forward.

>> That is I mean, that is just wild. And you know, you look at this, like you mentioned, this is a 70 billion market cap company that he started after Capital One. Capital One's the model. I mean, Capital One today is I think it's less than 70 billion in market cap. So like, they started later. Like this is just it it's an incredible incredible growth story here.

But, let me go to uh valuation, right? So, they reported this morning, the stock is up about 10%. So, that's probably pretty nice for you. Uh they reported this morning, stock's up about 10%. Probably pretty nice for you. We we've learned this before, but I I obviously you still think there's a long way to go. People can listen to the whole podcast here that as we're talking, the stock's trading about 15. Uh that puts them at high teens to about 20 times price to earnings on an LTM basis. This is a business that owns earns a 30% ROE, right?

A- My my worry is I talk to a lot of investors who are US domestic based, and they'll whether it's a bank or a tower company or whatever, they'll point and say, "Hey, look at this great company I found. You know, peers in the US trade at 10 times EBITDA. This trades at nine times EBITDA, and it's growing faster. So, it should trade for a higher multiple." And I I always think to myself, "Well, maybe you're right, but like domestic, you know, I had this with Vion recently. Emerging market companies should have like a higher cost of capital. So, what is the right answer?"

So, here you have a company that's earning a 30% ROE trading for 18 times 20 times earnings that's growing quickly. I mean, if this was the US, you'd be like, "Hey, this should trade for infinite price to book with those metrics, right?"

We're we're talking about how much of the TAM can they hit before they start slowing down? Brazilian banking? I don't know. Like, what's the right cost of equity for a Brazilian bank? Cuz if it's 15, they're still earning a ton, but that's way higher than a US bank. If it's 45, which if this was I don't know, some emerging market beyond Brazil, they'd actually be destroying capital. Like, what's the right cost of equity? How do you kind of frame that valuation? How do you think about all of that?

>> Yeah, it's a great question. I I think at the core maybe some of it is philosophical, right? So, when you're in in my opinion, when you're investing on one of these leading edges of of a sort of a disruptive um business model as we believe new is not that solely in Brazil and these other countries. I I I'm not sure anyone has a has the right answer the question.

So, I would say we would argue that this is more of a tech company than a bank. Um obviously, if you go back and look at, you know, at the history of banking with branches and and uh you know, they're not even in mortgages basically. If you look at traditional what a bank balance sheet looks like, it almost looks not much like although obviously there's loans and deposits. It it otherwise it doesn't look like that um like new bank.

So, um I think it it depends how you frame it up. The way we frame it up is we sort of look at 2029, 2030. We think the company can make about $2 in earnings or or to answer your question on multiple, we use this uh roughly 16 times multiple, which I think is is fair.

So, I I would I guess to go back to your question, I again, I don't think anyone knows exactly the answer. The the the company and ourselves would say it's it's more of a tech company than a bank. Um I think time will tell how how true that is. So far, I think it's it's been a a fair argument um and I think your question about Capital One and and if they can continue to grow at this rate and produce these kind of returns, I think that their argument will uh be be more true 10 years from now than it is than it is now, but we we shall see.

And I think the answer there has been A, there's always this regulatory axe that people are worried about with an emerging market and what we can talk about the Brazil specific Nubank one in a second, but I do think there is something to hey, people just aren't going to give you a big multiple. They're they're always going to worry about that because of this cost capital issue and everything.

So, how would you look at Nubank, you know, if you're investing today, you're doing it because you think it's going to be alpha, and Kaspi and MELI, they haven't performed poorly over the past five years, they just haven't like generated tons of alpha. So, what what do you think is different here versus those two peers?

So in our opinion both of those businesses including new are firing on all cylinders. There have been short-term issues that we could get into on another time on on Kaspi or something like that. But I would say those business models over the long term are remaining intact

and our view is that Nubank has a similar uh you know competitive advantage with the data that they have, the scale and and so on. You know, just basically constantly pleasing customers, adding more and more products, going into more and more geographies and so on.

So so yeah, the short term summarize the short term is a question mark, but our view is that all of the three businesses that we're discussing that you mentioned should have a tremendous you know opportunity over the next 5 to 10 years.

>> Let me go back to one more thing you said earlier. You said, "Hey, Nubank in our mind isn't a financial company so much as a fintech, right?" Like a internet. And look, again, people can go look at the metrics they publish and they publish lots of metrics more than most companies. You can look at their they've got better loan underwriting, all this sort of stuff.

A frequent thing I hear from people is hey, just in researching this, a frequent thing I hear is hey, these guys are actually too conservative on their loan underwriting. They they would be more profitable if they actually increase their loans and did did some more bad loans, which is not something you hear a lot, right? But I did hear you say, "Hey, these guys are branchless, better technology."

And if you're lending at 30% ROE, maybe it's because you're more efficient, but there's always going to be incentive for some guys under cut you to stay in business. So, you know, I guess my question is with their market share, why isn't this right now kind of at the path of it might come back to Capital One in 2006 where it's hey, they're so big they can't take much more share without the banks really pushing back aggressively.

The banks look at that and say, all right, it's existential for us now. We need to cut costs or even the regulators step in and say, new bank, you're the fifth largest bank in Brazil. We just need to cap your your lending because you're becoming a you know, a SoFi, significantly financial significantly institution that is kind of too big to fail.

So, there's a lot I actually there, but I I'd love to just ask about like kind of that forward look. I would point out obviously in my opinion that they are not nearly as focused as Nubank having all different kinds of businesses and transforming and so on, which is obviously worked for them, but in my opinion is not the same focused economic model that that Nubank has.

As it relates to you know, push back by the regulators and so on, it's important to keep in mind that Nubank has brought a lot of their customers sort of out of the unbanked population. So, as you can imagine in Brazil and it's also the case in Mexico and in Colombia and actually here even in the Latino population in the US, many folks have no credit score, no access to banking system and their ability to use their data to be able to underwrite even in a small way those folks at the beginning is excuse me [clears throat] is very powerful

and and I they they really for that reason and well, for many reasons in Brazil in particular have a very sort of fanatical following. So, the idea of the regulators of the population going against them anytime soon seems unlikely, but but anything is possible.

I would also say that it was as it relates to the loans, you know, you mentioned the efficiency that the fact that they are, you know, however you want to frame it, at least twice as efficient if not more. For instance, I don't think I mentioned they have something about 13,000 customers per employee at Nubank where the legacy banks have about 1,300. So, again on that metric it's almost 10 times as more efficient.

So, what that allows them to do is underprice not on every product, but but as it relates to the the private legacy banks in Brazil, they they're able to underprice them because of that efficiency.

So, again, I over time of I'm sure there will be competition. You see it in the different markets and but our argument would be even that competition, it's going to be difficult for them, but more likely that that those folks will be eating out of the legacy banks or the you know, the legacy banks both in Brazil, Mexico, and and the other geographies.

>> That is crazy. 13,000 versus 1,300. Though, you also don't know like, you know, is there mortgage servicing on one or the other, but that that is just wild on the face of it.

Let me ask Brazil is their largest market? >> Yep. >> Let's put the other markets to the side for a second. Just are there any risks around Brazil macro, regulatory, anything that you worry about with this company?

Brazil is their largest market? >> Absolutely. So, yeah, just to be quite clear about that it's Brazil. As you and many of the listeners know, there's I think a crisis there every normally every few years or whatnot. There has not been in in a handful of years and so obviously, you know, we'll see over time.

I would say a few concerning things. One would be for instance that the plus 90-day NPLs in the banking system are at 15-year highs and part of the reason for that is the Selic rate the interest rate in Brazil was up in the mid-teens and and just recently they've started to drop it down, but as you can imagine that stretched the customer to a large extent.

The average customer in Brazil is heavily indebted and so if you if you speak to Brazilians they're getting credit card offers in the mail every 5 seconds and calls and so on for for new

So that there's that there's a presidential election more short term coming up in in October. Our our view is that the market is pricing in another Lula win. Again, obviously Lula is the the president now so things have been going just fine for for Nubank but obviously to the extent that there's political turmoil of any kind later in the year that that could cause a problem.

So we we could go into and I guess I've touched on some of the mitigants as to why we think even even in a more macro stress situation that that Nubank should do just fine but yes for sure there it's you know it's an emerging market at the end of the day that has a history of some very volatile periods.

but if I just put those emerging markets and everything to the side you know how we you you kind of mentioned hey when I run this out to about I think you said 2030 I I look at you valued at like 17 times 2030 EPS which does not assume any multiple expansion right? So you're you're valuing it all on growth but when you talk about that 2030 number how much value are you baking in for Brazil versus the expansion markets?

We we don't count the US and and obviously the company thinks that that there's a pretty decent shot that they can earn significant market share. I I I have to go back in the numbers but Brazil is obviously still a very very large part of it. We are assuming that Mexico sort of continues on the trajectory. Colombia is a small part but again earlier stage similar to to Mexico. So we sort of continue to the the stand of all three companies at the sort of the current rates. It's not like one becomes more out way. I I say on a profitability, obviously Mexico just crossed over the break even here in the last a few quarters. So, obviously that will will in terms of profitability for the company, that will start to increasingly become more meaningful as the operating leverage starts to shine through.

Yes, that that's right. Particularly under the assumption you're you're mentioning, we we have sort of the ARPAC again, which is the contribution margin effectively per customer per month. We we we have that going from roughly 17 up to I believe in the high 20s. The mature cohorts in Nubank are already in that range and the incumbent legacy banks are more in the 40s and there's some good reasons why they structurally should be higher because they have other additional services that that Nubank doesn't currently offer.

Let's go [snorts] so they've got three expansion areas, Mexico, Colombia, and the US. Mexico just crosses profitability, the other two are drags because they're investing to get the startup businesses.

I mean, Mexico is already a past break-even, but like, why do you think this could should be successful? And given the upside that they have in the Mexico in the Brazil market, like, does it even make sense for them to spend time kind of diversifying away from this?

But, I I I would say one point I I would make and it's an important one that I didn't touch on earlier is part of the reason for the underperformance recently in the stock is that there was a handful of management departures and particularly people that were very highly regarded by investors and including the CFO. And and so, one of the reasons in our opinion, or maybe the main reason those folks left is that the David has has is trying to take the company in global direction and part of that is obviously finding folks that have built global businesses. So, Rob Livingston, the new CFO who just joined the company recently, for instance, built was running a was the CFO, excuse me, of Visa North America. He'd spent a lot of time, I think 18 years or so at Capital One. There's folks like that. The new product officer, chief product officer, just came from Shopify.

As it relates to the US and and going past where they they the current geographies, they they have mentioned that they're going to cap the investment for the next few years at 100 basis points the the efficiency ratio. So, they they are very aware that they are not going to they don't want to spend the the golden goose going into all these geographies and and and risking the company.

I I would say, though, at the same time, you know, you look at at Mexico, investors, you know, five or whatever years ago were saying the same thing about that. So, I I guess that comes back to the hour discussion about, you know, philosophically, you know, going back to Citibank as you mentioned in the 80s or 90s how was that managed and admit I mean I'm not being an expert on on what happened there but I would say again a big part comes back to the management team here that the thoughtfulness I would say at the end of the day they acknowledge you know that the chief product officer acknowledges for instance that the app will be different in you know each market and so on and so forth and not only that the credit metrics themselves the data is going to be different you have different all kinds of different um you know coming from the government not coming from the government so on and so forth so the answer is that I I think that they are going to do it in a very thoughtful calibrated way and if if it's not working they will stop doing it is our hope and and deploy capital or return it to shareholders but I I do believe that at the end of the day the business model of going into a given geography and having a far more efficient far more attractive product to the customer is still although it's you know now been around for 12 13 whatever years is still relatively under penetrated the digital banks around the world are still a a small minority of the banking system and our opinion is that over time they should be the whole thing so that's really the question

The nice thing about it I believe they bought back shares in the first half of the year and it looks like you know given we talked about the stock is up to 15 and I think they bought them in the like low 12s like the nice thing about having ROEs of 30s if if your stock is trading for 15 times price to earnings ROE is 30 you can have enough capital to you're profitable you can buy back stock you can grow the core business and you can grow the emerging markets like you can invest in everything when your ROE is 30 it's kind of nice that works

if I told you hey I've been looking at this bank that's doing great ROEs and they're letting go of all their people with local market expertise and banking background and they're hiring people with global fintech background you know that sounds nice we're in a we're going to take over the world sense, but I I I'm also really worried about hey, that I've seen this before, you know, you you hire the people and say, oh, we're making this big push and say, oops, we lost control of our core business. Writing off a bunch of loans this So, how do you think about managing that when as you said, the reason the stock might have been weak in the first half of the year is a lot of the core guys, you know, nobody likes to see the CFO leave at any type of fintech or banking platform. A lot of the core people are leaving for people who, yes, might be more well-known globally, might have more global experience, but they don't have the local banking core Brazil experience.

Yeah, great question. I would say and I didn't mean to overstate that the the folks who left were at the very top and and we don't get any sense that through the ranks that the core business, you know, that the actual operating people or even the people below them were departing. I I would say so in that sense it's not like the whole Brazilian team is is walking out the door or something like that. They they've restructured it so that I believe now there's a CEO of each country that that is a a local or or at least intimately familiar with the business and then there's a LatAm CEO. So, it's more of a reshuffling, a restructuring and and one could argue on the other side that as I understand it the direct reports that there were too many layers in David's opinion coming up to him from from the different businesses and now that has actually been streamlined. So, I I I think the the direct reports have actually shrunk down. So, his argument would be now he's he's closer to the business and keeping a closer eye and again those folks that are for instance doing the credit underwriting in Brazil are still doing the credit underwriting in Brazil. It's not like they've hired some you know, team from Iceland to do that or something like that. So, I guess time will tell. But, you know, I think what so far what we've heard and again, you know, in in the the last podcast that the company put out with Rob Livingston, the new CEO, he's he's David mentioned, you know, what are you going to be focused on and we very much like Rob answer which is I'm going to continue to focus on Brazil, you know, make sure the focus of the company is on Brazil and not you you to the next 10 markets where we're going. So, again, I I think time will tell, but uh we're optimistic that this is being done in a thoughtful, prudent way.

Slightly pivot. David is a very I mean, look, he started a $70 billion bank you know, in mid-40s, very highly regarded executive, right? Uh owns a ton of this stock. He just joined the board of Open AI. So, I guess I would ask you two questions then. How much of Nubank, in your opinion, is a valuation bet? We mentioned uh you know, high teens multiple for a 30% ROI business that's growing quickly and has a lot of room to grow versus a business bet. We mentioned KPIs off the charts versus all their Brazilian competitors, way more efficient, probably the right to win versus a jockey bet. David, you know, super well regarded, started this business uh deep ties throughout a lot of the tech circles. Like, how how do you kind of think about this overarching?

Yeah, it's a great question. So, I the way we frame up the world is we're we're always looking around for what we call customer fanatics. So, I guess the the simple answer to your question is we we like to think that every investment we make is at the end of the day a jockey um I would say in in the case of of Nubank, it's particularly jockey bet. I I think um not not only because of his control of the company, but the way he treats shareholders. Uh a few years ago, he had a a comp package that I think would have added another few percent uh to to um his ownership if he had hit certain metrics, and he decided to get rid of that uh I believe for for more or less free um because he didn't think it was, at the end of the day, uh fair to shareholders. There's other uh similar moves that he's made that um uh that uh support, in our opinion, that view. I I would say on on the multiple, you know, as we touch on it, I I don't think you really need multiple help here. Um I think um that uh you know, David just continuing to execute uh you know, in the way that he has and as we mentioned, he's he's still quite young um and um you know, the the longer we're in the business of investment, that the more important I I would say that the the jockey makes. So, um questioning that the jockey's every single move uh and and um, you know, I think it's worthwhile doing that obviously as it relates to going into certain countries and and other geographies, it makes a lot of sense. But um, so far uh, the way they've built this business and um, uh, clearly the results uh, lead us to believe that, you know, he is an exceptional talent and um, while one can question, you know, each move, it's probably best to to um, at the end of the day unless one reason one has a a good reason not to uh, believe him that to let him continue to build the the um, the business.

Let me ask one more question on him. And I I don't know anything about him. He obviously is super highly regarded. People can hear that throughout the podcast. There's one interesting thing. He just joined the board of Open AI. And you can correct me if I'm wrong. And I thought that was interesting because A, talk about being plugged in, talk about being connected. Like I'm sure there are boards that are more prestigious to join right now, but I don't think there are many, you know, like that's a really cool thing and it speaks to connections. Obviously, you mentioned the Sequoia

He just joined the board of Open AI.

So, how do you think about him joining Open AI in the context of seems like that might be a little bit of a distraction. I I I just think it's a a weird thing for like a fanatic with all of his net worth tied up in this business.

Yeah, I would I would agree um, that there's a risk of that. So, yesterday someone one of the analysts asked him on the conference call about that and he basically said that it's to benefit of Nubank. And and I I think that there's probably a large element of truth to that.

I think um being at on, you know, on the board of one of the largest you know LLM's uh, AI businesses in the world I would think would provide a lot of insight. Um the the other thing and and we could dig into it now is how how much AI is is helping uh new bank uh become smart.

So so when you're competing with legacy players and you're like the fintech enabled player you have to think that AI if you exclude the hey the government is making sure that five players get cyber security protected you have to think AI is going to be mass for them cuz they're just going to be so much faster so much more efficient.

No no so so yeah maybe to transition I I guess you're you're right or normally if we saw what we as a fanatic and to your point he his vast majority of his wealth is in the business um and you know he's obsessed with pleasing the customer and so on so then the question is well why would he be spending whatever hours per month on on this

and and again I guess just to touch on some highlights um you know something like 60% or more now of the uh customer inquiries are are handled by AI. So without human interaction um and on on the first uh pass. So there there's a tremendous cost savings there.

David David has talked about sort of uh this becoming an AI business in in the sense of um the AI helping on the financial advisory side on on all kinds of things they they talk about it just because you have a bank account doesn't know what you mean you know you know what you're doing as it relates to that. So there's a there's a huge value of AI just helping the customer

um and then as I said on back on the business side I think you they're using Cognition's uh models and they've talked about the Devin AI agents and basically apparently over over they put out a blog about they recently there was like a 12 times efficiency gains in in engineering hours and a 20 times cost savings um on on the implementation of of um you know what is going on in inside the business.

They they also talk about how they they credit scoring and the data it used to take months so they would update their model every few months. Now it's it's down to like something like a handful of days. So basically AI is changing all parts of the business the customer service that they credit they they can obviously therefore to a earlier point write much more credit with uh you know with with with much more security in in terms of understanding that the risk of that.

And so again to to bring it back we would normally be skeptical but I would say in this case the amount of impact that AI is having on the business is so incredible that I think that that my guess is that he heard this opportunity and said you know this this would be silly to pass down this is as good as going to have a huge my insight that I'm getting from this relationship and integration as part of the board would be a huge value to Nubank itself.

Let me ask you a broader question on AI as it relates to fintech because there is nothing to me that is more commodity than a financial product, right? Like I have a credit card if I'm looking for a credit card loan you offer me 19% you offer me 18% cool I go with the 18% like I don't really care about anything else. Checking account all this sort of stuff. Now maybe that's a little bit too far because like you know if I need an ATM I want ATMs close by or something but really financial products are about as commoditized as you can get. Mortgage you really don't care as you want the lowest mortgage as long as you can send a check in.

I have worried for all like I've thought about the US banking system. I've worried for all of them like the US banking system is built a lot on zero cost deposits, right? And people probably remember back when in March of 2023 there was the regional banking crisis and there was the whole shorting of cash, right? Everybody was worried all the cash was going to short to high yield money markets and destroy the entire business model. That didn't really happen but I have worried with AI like the the best place I can think of AI in terms of if consumers start using it to maximize their lifestyle would be AI optimize all my finances, right? Get me all of my checking accounts into the most high yield things with you know in the US FDIC insurance. Any place where I'm paying interest on on card or mortgage go find me a cheaper one if you can and do that constantly.

So, I've worried about that and so, if I brought it back to Nubank in the short term, I bet they are going to be so much faster than a lot of their peers at adopting the AI, but in the long term, like that that results in super normal profits for 6 months, a year, two, three years, I'm not sure. But in the long term, if everybody adopts them, like I'm worried the profit pool is going to zero and that 30% ROE we talked about, everybody just competes it away because AI does everything.

So, that is like a more high-minded, maybe longer term thought, but I I I it's something I've thought about with US banks and as you said, it made me think with Nubank. So, I'd love to ask how you kind of think about that.

No, it's your another excellent question. I I would say there's a lot of points there, so I'll try to remember them all and get them in sometime. >> AI's impact on the entire financial system? Is is it a 2-minute soundbite?

>> Exactly. So, um I guess number one at your point your first point about commodity and I would agree at some level that's true. I would say then if if you want to make that assumption, then the most important point in a commodity business is to have the lowest cost, right? To be the the most efficient is the last guy standing.

As we've discussed, I think at least as of now and for in my opinion, the look foreseeable and potentially very long-term future, Nubank, no one is going to be more efficient than Nubank in in the efficiency and therefore being able to to your point about the credit cards, you know, 1% lower, they should be able to offer the most efficient rate because of the, you know, the scale that they have and and branchless and you know, again, that's a whole 'nother conversation about how hard it is to close these branches and so on and so forth and and change these legacy banks and and how slow that that process can be.

But I I would say yes, so so I think the number one is is the is is the just the fact that they are so efficient and therefore the lowest cost. Again, if you want to make the assumption of a commodity industry, I would push back on the the the pace of change, right? So, in many folks in the US, that what, five banks that control a massive, whatever percentage of the the banking system and they pay almost nothing to your point on deposits and yet still the the people keep including myself keep keep money at these banks and as it relates to AI suggesting that they pull it out again I think if you are offering the best rates so on and so forth. There is an element and I don't think that this will change probably even in our generation where even FDIC backed and so on where you want security, you want obviously a good customer service and if those things are being achieved so the low cost and customer service I don't see why you would train change your you know even with someone's you know AI suggesting that you do so I don't see anytime in the future or in the near future where that would that would change so I would say those combination of variables again with the customer service that you know that they and and the low rate I I I don't see why someone would go somewhere else.

>> Let [snorts] me ask one last question then probably need to run to the bathroom to be honest with you. There you mentioned Mexico, I get it. Columbia, I get it. You know the one expansion where I look and I say ooh, is this kind of too much to moving into the US, you know, if you just told me hey, there's a emerging market player that's moving into the US in fintech be like this they're too and they've got too much of an inflated ego right like the US is very very well served. I'm not saying there aren't underbanked people but there are lots of very juicy startups that are really attacking these problems at a thousand times lots of really good banks with great and just kind of like, hey, why are they why are they moving in here like they've got so much on their plate and they've got so much opportunity to expand and when I see I think that's the thing where I see hey, we're moving to [snorts] the US it kind of brings me back to the question earlier where I said hey, I haven't seen fintechs expand successfully say I might believe it if you told me Mexico and Columbia but when they move into the US I kind of say oh, maybe these guys just think they're god kings and don't understand that the competition they're going from

So, I just want to get your thoughts on that expansion cuz they talk about it a lot, too. >> They they do, yeah. Um and and again, I I think they're that is a source of what's called anxiety for the you know, the investors today.

Um I I would say um a few things. One, um I I uh you know, as I said, they they've decided to sort of cap uh correctly or incorrectly for the next few years their their investment. So, it's not like that they are betting the company and I I also should note that as I said in our valuation and our you know, view of the future, we're not counting anything, nor are we uh subtracting anything to to your point. So, obviously, if they the management team decides to dump you know, billions of dollars here and and not get a return, then obviously, that would be a uh a you know, a reduction in our our valuation estimate.

But, I I I would say um so, a massive something like one in three Hispanic folks in the in the US citizens in the US are are unbanked, basically. And and so, they are um they are not just going to the average person in the US. They are going to a very specific part uh being here in Miami. The the co-founder, Cristina, moved here in the last year or so. They're they're making huge push uh here, I believe, in in probably Texas and California where you have a huge immigrant population from Brazil, from Mexico, and so forth. On many of these folks are are familiar with Nu and um I I So, I think that's part of it.

um I think NuBank thinks that they can provide even a far better service digitally um with much better user interface and so on potentially over time more attractive cost.

So we shall see again I think the verdict is out they seem to be doing it in a very thoughtful way bringing in people who know what they're doing and it's a very very large market. I think they've said that they're you know over time targeting 5 to 10 million customers would be a good scenario. So again they're not assuming that they're going to become you know a 10% market share bank. So we shall see. It'll be a very interesting experiment to to your point others have tried and it has not necessarily gone well and we we shall see but I would say high level we're quite optimistic about how they're going about it and if you sort of dig into the niche that they're focused on I think there's a pretty good shot that they can you know make some progress here in the US.

I mean the Nubank's model of Capital Capital One Chase like these apps are pretty darn good. So yes if you go in person it's slow but the in person is like it's also there for when you need to to prove your identity or when you need like cold hard cash like most of the other stuff can be done online. So if you're saying hey I wouldn't compare Nubank to the in person I would compare Nubank to the app and I say that the apps are pretty damn good across the board.

>> last thoughts you have on Nubank or anything you want to leave listeners with? >> No I I think you know we we've done a good job covering the highlights. I think you know it's a it's a name that I

but I would say considering the the valuation you know has come down materially here with your buying into a sort of situation with a customer fanatic at a very attractive price that over the you know, five five or next 10 years that could and and should produce very attractive returns going forward, but time will tell.