Nubank IPO Filing: A Look at Neobank Economics

The Evolving Economics of Digital Banking

With the initial surge of neobanking now stabilizing into a landscape of established digital banks, a clearer understanding of the financial dynamics underpinning these ventures is emerging.

Chime, for instance, previously demonstrated its ability to achieve positive EBITDA, a contrast to the financial performance of some European neobanks.

Nubank's IPO: A Detailed Financial Insight

The forthcoming initial public offering (IPO) of Nubank – or Nu, as it is formally known – offers an unprecedented level of transparency into the operational economics of a neobank operating at a significant scale, due to its recent public filings.

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The financial data released by Nubank presents a positive outlook for other neobanks considering a public offering, suggesting a viable and logical business model.

Further analysis of the company’s offering, its investor base, its diverse revenue streams, and other key aspects will follow.

Currently, our attention is focused on the overarching economics of neobanking, culminating in an assessment of Nubank’s overall financial standing.

We will briefly evaluate potential valuation metrics based on our findings.

The Cost of Scaling a Neobank

Establishing a neobank with substantial reach requires significant investment.

Prominent startups and unicorns in this sector have secured massive amounts of capital to achieve their current positions.

However, the question remains: what tangible benefits have these substantial financial injections yielded?

In Nubank’s instance, the answer appears to be considerable gains.

The capital raised has demonstrably contributed to the company’s growth and operational capabilities.

This suggests that strategic investment can indeed translate into success within the competitive neobanking landscape.

Understanding these financial dynamics is crucial for evaluating the long-term sustainability of these digital financial institutions.

The Financial Dynamics of Neobanking

Nubank has established itself as a highly valued startup globally, currently serving over 40 million customers throughout Brazil, Mexico, and Colombia.

Analyzing neobanks, similar to any consumer-focused business, requires examining customer acquisition expenses, customer engagement and monetization strategies, and potential long-term revenue streams. A key question is determining Nubank’s cost to gain each new user, how product utilization translates into income, and the fintech’s capacity to maximize revenue per user over an extended period.

Acquiring Customers: A Cost Analysis

Nubank emphasizes its efficiency in customer acquisition. According to its F-1 filing, the company’s customer acquisition cost (CAC) was “US$5.0 per customer, with approximately 20% attributed to paid marketing” during the first three quarters of 2021. This figure is notably lower than initial projections.

As detailed in Nubank’s TC-1 report, the company’s broad geographic reach and diverse product offerings have spurred competition from entities focusing on specialized user experiences. However, current data demonstrates that increased activity within the neobank sector hasn’t diminished Nubank’s ability to attract new clientele.

The company further stated that it has “acquired roughly 80%-90% of its customers organically each year since its founding.” This highlights the effectiveness of word-of-mouth marketing, reducing the need for substantial investment in sales and marketing initiatives.

Should the reported CAC remain consistently low, we anticipate observing corresponding efficiencies within the company’s sales and marketing expenditures as reflected in its income statement.

Nubank’s IPO documentation clearly demonstrates that achieving significant scale for a neobank with moderate CAC is, at least in certain markets, a viable possibility.

Customer Engagement and Revenue Generation

As of Q3 2021, Nubank reported a customer base of 48.1 million. This represents a compound annual growth rate of 110% since Q3 2018, according to company data. These customers demonstrate substantial activity, with 73% classified as “monthly active customers” as of September 30, 2021.

Growth continues apace. The filing indicates Nubank “added over 2 million net new customers per month, collectively across Brazil, Mexico, and Colombia” during Q3 2021. Furthermore, the proportion of daily active customers relative to monthly active customers has increased, rising to 47.9% by the end of September from just over 41% at the close of 2020.

Investors apprehensive about a potential slowdown in Nubank’s growth may find reassurance in the prospect of these new customers generating substantial revenue over time. Nubank reports that customers tend to become more profitable over time; for example, the 2019 cohort generated 5.5 times the revenue in the year ending September 31, 2021, compared to their first year.

This suggests strong customer retention and increasing revenue per user. Nubank measures the latter through “monthly average revenue per active customer,” or Monthly ARPAC. Here’s a current snapshot:

The combination of engaged customers and robust Monthly ARPAC, relative to the company’s CAC, results in cost-adjusted CAC payback periods of under a year, particularly within the Brazilian market – Nubank’s origin.

Nubank’s IPO filing suggests that neobanking customers can exhibit favorable usage patterns, leading to growing revenue streams and sound long-term economic performance, even if CAC payback periods are measured in quarters rather than months.

Assessing Long-Term Value

The filing provides preliminary data regarding customer lifetime value (LTV). Nubank’s LTV/CAC ratio – the ratio of a customer’s total revenue contribution to the cost of acquiring them – is estimated to be “greater than 30x.”

In the enterprise SaaS sector, a ratio exceeding 3x is considered desirable. While we are examining a consumer-focused model rather than B2B, a 30x ratio remains exceptionally attractive.

Nubank’s LTV/CAC ratio indicates that successful neobanks can potentially increase spending on customer acquisition without compromising their overall financial stability. 

Understanding Nubank's Financial Performance

While numerous secondary metrics exist, a true assessment of a company’s financial health requires a detailed examination of its core accounting results and income statements, evaluated using consistent measurement standards. In the case of Nubank, a Brazilian firm, we must analyze its financials under International Financial Reporting Standards (IFRS), which are largely comparable to Generally Accepted Accounting Principles (GAAP).

Income Statement Overview

The following income statement presents Nubank’s financial data prior to tax calculations:

All figures are expressed in millions of US dollars, revealing that Nubank generated $1.06 billion in revenue through the third quarter of 2021.

Growth and Losses

An initial review of the income statement indicates a rapidly expanding business, accompanied by increasing losses. However, considering the company’s size, these losses do not appear critically concerning; they are, in fact, more contained than initially projected.

Importantly, the rate at which losses are increasing is decelerating. Despite a near doubling in size between the first nine months of 2021 and the same period in 2020, Nubank’s losses experienced only a marginal increase. We anticipate the company will soon be capable of reducing its losses and establishing a clear trajectory towards profitability.

Revenue Trends

From 2018 to 2019, Nubank’s revenues almost doubled, reaching $612.1 million. The subsequent year, 2020, saw slower growth, with total revenues amounting to $737.1 million. This deceleration coincided with a reduction in marketing expenditures, potentially influenced by the economic disruptions caused by the COVID-19 pandemic.

Growth has since rebounded to approximately 100% when comparing 2021 to 2020. The increase in top-line revenue from $534.6 million (Q1-Q3 2020) to $1.06 billion (Q1-Q3 2021) is a significant achievement. Had Nubank reduced its marketing spend by a few million dollars during this nine-month period, it could have achieved a net loss of zero.

Sales and Marketing Efficiency

We previously hypothesized that if Nubank’s claims regarding low customer acquisition cost (CAC) and strong word-of-mouth marketing were accurate, its income statement would reflect modest sales and marketing expenses. This proves to be the case. The company invested just over $45 million in sales and marketing throughout the first nine months of 2021.

For a company generating over $1 billion in revenue during the same timeframe and experiencing roughly 100% growth, this expenditure represents a remarkably low proportion of revenue.

Implications for Neobank Profitability

Nubank’s IPO documentation highlights that neobanks demonstrating strong user acquisition metrics can achieve rapid profitability due to reduced spending needs. Conversely, neobanks lacking a comparable growth engine may face steeper losses and a less favorable economic outlook.

Determining Nubank’s Current Value

Nubank’s most recent valuation stood at approximately $30 billion following a $750 million funding round several months prior. However, what is the company’s worth today? Based on its financial performance during the first nine months of the year, projections indicate an annual revenue of around $1.42 billion.

It’s important to note this figure is a conservative estimate, derived from a three-quarter run rate due to the unavailability of data for a full-year projection.

Despite this, Nubank currently trades at a revenue multiple of approximately 21x its last privately assessed value, even considering the potentially underestimated revenue run rate.

For a business operating with gross margins around 50%, this multiple might appear somewhat elevated.

However, the recurring revenue streams from its customer base resemble a SaaS model, potentially justifying a greater focus on growth rather than immediate profitability from an investor’s perspective.

Potential IPO Valuation

This perspective could be a key factor in the company’s expectation of a $50 billion valuation upon entering the public market.

Such a valuation would be highly positive news for other fintech companies considering an initial public offering (IPO).

It would suggest that private market valuations can be sustained and validated by public market investors.

This outcome would be particularly encouraging for non-traditional banking institutions seeking to list their shares.

• Revenue Multiple: Nubank’s current revenue multiple is approximately 21x.
• Gross Margins: The company operates with roughly 50% gross margins.
• Projected Revenue: Annual revenue is projected to be around $1.42 billion.

The potential for a successful IPO and a high valuation underscores the growing investor confidence in Nubank’s business model and future prospects.

The Future Landscape of Neobanks

Nubank’s move towards a public offering isn't an isolated event. Several other neobanks are also preparing to enter the public markets, signaling a potential shift in the fintech industry.

Emerging Competitors

PicPay, a fintech platform offering peer-to-peer payments alongside e-commerce and social features, filed for an initial public offering of $100 million on the Nasdaq in April. Chime, having secured $750 million in Series G funding last August, is anticipated to go public by March 2022, with a projected valuation ranging from $35 billion to $45 billion.

Furthermore, U.K.-based challenger bank Monzo, which has raised approximately $650 million, has indicated its intention to pursue an IPO. Starling Bank has also expressed similar ambitions.

Implications for Investors

The coming months will provide investors with initial insights into the financial performance of consumer-centric, fee-free banking startups. This increased transparency could trigger further exits or, at the very least, confirm the substantial funding activity observed in the private market.

New financial data may demonstrate that neobanks are transitioning from an investment-heavy phase – characterized by significant expenditure aimed at future profitability – towards a more sustainable model based on consistent, recurring revenue streams.

Nubank’s Impact

The detailed financial disclosures within Nubank’s F-1 filing are expected to be beneficial for the entire neobank sector. Increased transparency and liquidity will likely be positive developments for these emerging financial institutions.

Transparency and liquidity are key factors that will shape the future of neobanks.