Returns as of 02/25/2022
Returns as of 02/25/2022
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When it comes to diversifying your portfolio, you have several viable options, including geographic diversification. Buying stocks in companies that operate around the world can even out any adverse economic conditions that might only affect one country or region you care about. Inflation, for example, is running high in the U.S. But in Singapore, inflation was just 1.5% in 2021.
A couple of international stocks you might want to consider for your portfolio are Grab Holdings ( GRAB 5.46% ) or Nu Holdings ( NU -2.02% ). Grab is based in Singapore and is looking to become a Southeast Asian super-app. Nu Holdings — a digital financial services company in Latin America — is trying to fight the financial complexity that exists in the region today. Both came public via a special purpose acquisition company (SPAC) merger in late 2021, but which company is a better buy for 2022 and beyond? Let’s find out.
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Grab wants to become the hub for everyday life for those living in Singapore and the rest of Southeast Asia by offering services that everyone needs daily. The company’s core services — delivery and ride-hailing — had over $2.8 billion in gross merchandise volume spent on its platform in the third quarter of 2021. Add all three of its services together and the company has 22 million monthly transacting users, leaving Grab plenty of room for growth in a Southeast Asian population of 679 million.
Grab’s opportunity is extremely large, but the company has not yet proved it can take full advantage. In the most recent quarter, The company’s revenue decreased 9% year over year to $157 million. Management cited short-term pandemic lockdowns in certain countries as the reason revenue fell, but some of its biggest markets — like Singapore — are largely open for business due to the high vaccination rates. And despite being a $21 billion company, Grab’s margin profile is not good. In the first six months of 2021, the company had a gross margin of negative 28% and posted a net loss of over $1.4 billion, a figure that represents 370% of revenue.
To capitalize on the massive market opportunity and become the dominant super-app in Southeast Asia, Grab is going to need a quick turnaround. It already faces competition in the financial services business from Sea Limited and on the delivery and ride-hailing side is GoTo (a merger of two Southeast Asian behemoths Tokopedia and Gojek). If Grab disrupted both of these companies, it would be an amazing feat, but much harder to accomplish with negative gross margins and low growth.
Nu Holdings is disrupting the digital financial services industry across Latin America. The banking system in Latin America is dominated by five banks that control up to 85% of all banking revenue in Chile, Brazil, and Mexico. This dominance has resulted in almost no innovation in terms of technology, simplicity, or customer satisfaction in decades. Nu is trying to change this.
The company digitally offers users credit cards services, savings and checking accounts, loan options, investment accounts, and even insurance. These offerings appear to be popular as the three-year compound annual growth rate for customers has been 110% annually, reaching 48 million customers.
What is more important is Nu’s ability to satisfy customers. The lack of innovation in the space has caused the established banks to get lots of complaints, according to Nu management. It reported that the biggest banks in the region, on average, receive 1,420 complaints per 1 million customers. Nu’s customer-centric approach has resulted in less than 270 per 1 million customers.
The company has a total addressable market of over 650 million people. The digital bank is going after that market and has already started to see success. In Q3 2021, it grew its revenue 208% year over year to $481 million. Its net loss for the period was just $34 million, which grew just 5% year over year, so the company’s path to profitability looks very strong.
Nu looks stronger than Grab in virtually every part of its business, which makes its stock a much better buy today. Nu and Grab have similar market sizes, yet Nu has robust competitive advantages, a better financial position, and much more impressive growth. Nu stock does trade at 42 times sales compared to Grab’s 29 times sales, but Nu’s quality of operations makes that premium valuation worth paying up for.
There are competitors to Nu in the digital financial services space — mainly MercadoLibre — but with such a large opportunity, both Nu and MercadoLibre could win. Nu’s unique approach to tackling the digital financial services market has seen major success. I think that it could continue growing if the company continues to keep its customers happy and expand its product line.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 02/25/2022.
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