The Brazilian digital bank Nu Holdings (NAKED -4.83%) recently released earnings results for the fourth quarter of 2021, its first earnings report since going public in late 2021. The results looked strong, driven by huge revenue growth. Nu also added millions of new customers to its already huge base and saw growth in other key metrics as well. While there’s a lot to analyze, one metric investors should focus on is average monthly revenue per active customer (ARPAC), as it has the potential to make or break more or less naked. Let me explain.
Why ARPAC is so important
By the end of 2021, Nu had around 54 million customers, which is huge. But as bankers will tell you, while it’s good to have lots of customers, you need to be able to monetize that base. Some customers may cost you more to serve them than they are worth. ARPAC is a key metric that helps Nu determine how well it is monetizing its customer base. Nu defines this metric as the average monthly revenue divided by the average number of individual monthly active users for a given period.
In the fourth quarter, Nu’s ARPAC rose to $5.60, up 14% from the sequential quarter and up nearly 70% year over year. This is good growth, but the ARPAC at Nu still pales in comparison to traditional banks in Brazil which have monthly ARPACs between $35 and $38.
I doubt investors would expect to see Nu’s ARPAC this high right now, given that Nu’s entire business model is built around the idea of attaching much lower fees to its products than those observed in traditional banks in Brazil. This is one of the main reasons Latin American customers love Nu. But over the long term, it’s still a metric that investors expect to see go up.
Interestingly, management noted that among their cohorts of more mature customers, who have been with the bank longer and tend to make Nu their primary bank and use multiple Nu products, ARPAC topped $15.
These graphs can be a bit difficult to visualize, but the one on the far right shows that the cohorts of customers who joined Nu in early 2017 – around 57 months ago – now have ARPACs of around $15 or more. Nu Chief Operating Officer Guilherme Marques do Lago said he thinks this is something investors don’t fully factor into their valuation of the company:
As cohorts come and go, as cohorts mature, you can see that we’re becoming the primary banking relationship for more and more of those customers and we’re growing usage, engagement, and volumes of purchase with our basic products. And then second is cross-selling, as we release new products, as we release new features, we’ve actually increased that now average revenue per active customer.
The graph on the right also shows that new cohorts begin to progress towards the ARPAC number of $15 faster than older cohorts, which Marques do Lago attributed to the fact that the bank now offers many more products and offers than in 2017.
It’s still not a guarantee
When they were pressed by the risks for the bank, Marques do Lago said that while ARPAC trends seem strong, he still sees it as one of the main risks for Nu. I too believe that recent trends are supporting the growth of ARPAC as the company is significantly expanding its product base by offering different lending capabilities, an investment platform and an e-commerce marketplace which now has 20 partners. different. This should boost engagement.
But given the macroeconomic environment in Brazil and Latin America, consumer demand could be fragile going forward. Nu is an industry leader when it comes to customer acquisition costs, but these could also increase if competition emerges, making ARPAC’s growth critical. Ultimately, investors will want to keep a close eye on ARPAC, its growth rate, and client cohort maturation trends, as ARPAC’s direction has the potential to make or break this stock.