Brazil's Rising Middle Class Will Drive Digital Finance Expansion

Key Takeaways

• Rapid expansion of advisor productivity and new product cross-selling is accelerating client acquisition and shifting revenue mix, fueling long-term growth and higher margins.
  
• Structural advantages in financial inclusion and digital innovation position XP to capture substantial market share and sustain outsized asset and earnings growth in Brazil.
  
• Shifting client preferences, regulatory pressures, digital competition, and risky expansions threaten XP's margins, profitability, and long-term growth as revenue streams evolve.

Catalysts

Provides financial products and services in Brazil.

• Analyst consensus expects advisor productivity and sales force expansion to gradually boost revenues, but this likely understates the impact since XP is already achieving 11-fold increases in advisor activity and sustained improvements in client churn and allocation; further rollout to the B2B channel could drive an inflection in client acquisition, leading to a step-function increase in AUM and long-term revenue growth.
  
• While consensus highlights cross-selling of new products as a revenue driver, it fails to fully capture the accelerating trajectory: new cross-sell verticals like consortium, credit cards, global and digital accounts are growing at near triple-digit rates, setting up a scenario where new ventures could surpass one billion BRL in annual revenues sooner than expected, materially shifting revenue mix and lifting net margins.
  
• XP is poised to disproportionately benefit from structural growth in financial inclusion and the rising middle class in Brazil; as the largest and most sophisticated investment platform, it is uniquely positioned to capture outsize share of asset inflows as millions more individuals enter the formal financial system, which will drive multi-year compounding AUM and fee growth.
  
• XP's expanding dominance in the digital delivery of financial products and its ability to rapidly scale new verticals gives it significant operating leverage, suggesting future technology investments will translate to sustained efficiency gains, further boosting margins and earnings well ahead of peers.
  
• The firm's aggressive platform improvements and product innovations position it as the go-to partner for both retail and institutional investors as capital markets in Brazil deepen, meaning XP could see its market share expand well beyond current leadership levels and become the default destination for sophisticated investment products, turbocharging both revenue and EPS.

XP Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on XP compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming XP's revenue will grow by 17.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 28.5% today to 27.6% in 3 years time.
• The bullish analysts expect earnings to reach R$7.3 billion (and earnings per share of R$13.74) by about August 2028, up from R$4.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 13.7x on those 2028 earnings, up from 10.6x today. This future PE is lower than the current PE for the US Capital Markets industry at 26.6x.
• Analysts expect the number of shares outstanding to decline by 0.84% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

XP Future Earnings Per Share Growth

Risks

• The growing client preference for passive products, direct indexing, and robo-advisors could put long-term pressure on XP's traditional brokerage and advisory margins, and as seen in the text, fee-based models are expanding, which could gradually erode revenue growth and compress profitability.
  
• Heightened regulatory scrutiny and escalating compliance requirements, both in Brazil and globally, may increase XP's operational costs and diminish net margins, particularly as their large and rapidly expanding platform attracts further regulatory attention.
  
• Digital disruption and intensifying competition from fintechs and global technology firms entering the Brazilian market threaten XP's client retention and market share, as their ecosystem-while large-still depends heavily on scale and advisor productivity rather than on differentiated technology, which could challenge long-term top-line revenue.
  
• XP is relying heavily on the growth of fixed income and a narrow set of high-earning products, yet management acknowledges that revenue mix shifts and a slow rebound in higher-margin segments like equities could continue, ultimately capping earnings expansion if product demand continues to migrate toward lower-fee alternatives.
  
• Ambitious efforts to scale into new client segments, such as the affluent and private bank market and into verticals like consortium and insurance, carry significant execution risks, including higher cost-to-acquire, possible operational inefficiency, and greater potential for talent dilution as the firm expands, all of which could negatively affect net margin and long-term returns on equity.

Valuation

• The assumed bullish price target for XP is $25.41, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of XP's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $25.41, and the most bearish reporting a price target of just $18.72.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be R$26.6 billion, earnings will come to R$7.3 billion, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 12.3%.
• Given the current share price of $17.39, the bullish analyst price target of $25.41 is 31.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.