Nu Pagamentos SA's U.S. listing is largely expected to eclipse other Latin American offerings both in terms of volume and significance. Moving forward, however, the Brazilian fintech company will need to deliver on its premium valuation under a volatile financial environment.

Nu Holdings Ltd.'s New York IPO on Dec. 9 will catapult the digital bank to become the biggest financial services provider in terms of market capitalization not just in Brazil but in all of Latin America. Beyond Nubank's value, its listing is seen as a benchmark for the region's burgeoning fintech industry, which has gained the attention of high-profile investors over the past few years.

The road to Nubank's high-profile offering has not been smooth sailing. In its original prospectus, the company was aiming for a $50 billion valuation — the figure was later reduced to $41.5 billion as the company slashed its target price range by about 19%. The move came amid a global selloff of tech stocks, partly triggered by the spread of the omicron coronavirus variant and expectations of a tapering from the U.S. Federal Reserve.

"The adjustment to the price range comes on the back of an increasingly difficult environment for emerging markets equities and Brazilian equities in particular," according to Carlos Macedo, an analyst for research firm OHMResearch. "It appears appetite for risk and patience for growth has decreased, leading share prices for many companies in the sector to suffer, slightly narrowing the valuation gap between fintechs and incumbents."

Although Macedo believes that there has been no significant change in the operating environment for financial entities, he noted that "the exuberance that some of the valuations showed have been temporarily dampened." Developments in the global capital markets as well as in Brazil, including the 2022 elections, will likely influence how long this "temporary" slump will last.

"There was a huge drop in the valuation for finance companies in the market," S&P Global Ratings analyst Guilherme Machado affirmed. "The multiples that they were using to calculate those valuations did not come through."

A double-edged sword

Over the past years, Nubank has put itself in a unique position — bolstered by the acceleration of banking digitalization during the pandemic, the growth company racked up over 40 million clients and placed itself as a direct rival of Brazil's biggest banks. But this transition from a growth company to a highly viable competitor for traditional banks has also presented challenges on what the best approach to determine its valuation really is.

For one, its rapid trajectory from growth company to digital bank is a unique case not only in Brazil but worldwide, OHMResearch's Macedo highlighted.

"You're not going to find fintechs that have 50 million clients, right?" Macedo said. "That said, Nubank is also not yet profitable," which makes it difficult to compare with the local banks, he added. "So you're not going to be able to set multiples, which would be ideal."

Despite the lack of clear multiples to compare Nubank's performance to those of other banks, investors still see a viable entry point which is why the company will be able to raise its intended proceeds from the IPO, according to Macedo.

"In the U.S., you will find investors that are willing to pay," he said. "Nubank was able to secure a $30 billion valuation not very long ago. And most multiples and market comparables that wouldn't get close to that valuation today, especially after the underperformance in the last few weeks."

Meanwhile, S&P Global Ratings' Machado sees Nubank as "a very strong case based on its value." However, he is not as confident that it is "worth the amount of money that it is being evaluated right now at the time of the IPO."

"That remains to be seen," the analyst noted.

Walking the walk

Proving that it can provide investors plenty of bang for their buck despite a more turbulent operating scenario will be the biggest validation point for Nubank following this week's IPO.

"The challenge continues to be to monetize the client base that the fintechs conquered over the last few years, a process that is only affected by the downturn in capital markets to the degree that it makes fundraising more difficult. However, it does not appear to be a challenge in the short term," Macedo said.

Despite reaching more than 40 million clients, Nubank's prime base — or those who use the bank for most services — is smaller, ranging between 10 million and 15 million clients.

"You have all the ramp-up of these clients that are going to contribute more and more to the revenue base of the company in the future and all the potential for expansion in Mexico, Colombia, other places in Latin America and in the world. All of that, it speaks the language of these investors," Macedo noted.

Although reception for growth companies would be more subdued under the current operating context, Machado views Nubank's business profile as stronger than other fintech players such as merchant acquirers, which have been seeing a bigger downtrend given stronger competition and a decline in margins.

Machado pointed to the case of StoneCo Ltd., which has met some resistance from investors regarding the acquisitions it has made in Linx SA and Banco Inter SA. "StoneCo invested almost 10 billion reais in the past year in new companies and the guidance on how they're going to monetize those businesses has not been seen as sufficient to investors."

These developments serve as "a big red flag" for upcoming fintech listings and are things that Nubank will be paying close attention to, the analyst said.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.