Sales Team Expansion And New Products Will Drive Client Acquisition

Key Takeaways

• Expansion in sales team and cross-sell opportunities with new products aim to drive revenue growth and client engagement.
  
• Tech platform enhancements and share buybacks expected to boost efficiency, margins, EPS growth, and shareholder value.
  
• Elevated macroeconomic risks and increased internal costs may pressure revenue growth and margins, complicating capital strategies and relying heavily on competitive, internal product expansion.

Catalysts

Provides financial products and services in Brazil.

• XP plans to expand its sales team and enhance internal advisor productivity, especially focusing on IFAs. This initiative is expected to drive increased revenues by boosting client acquisition and engagement.
  
• The company is focusing on cross-sell opportunities with new product launches such as credit cards and insurance services, which are anticipated to grow revenues substantially due to low current penetration and strong market demand.
  
• XP's improvements in its tech platform and multichannel distribution are expected to increase efficiency and reduce costs, potentially leading to an enhancement in net margins.
  
• XP aims to capture market share in the DCM space and corporate securities market by leveraging its existing distribution power and expanded warehousing strategy, which is likely to drive significant revenue growth despite wider market conditions.
  
• Share buybacks are expected to complement earnings growth, leading to a faster EPS growth rate compared to net income, which may enhance shareholder value and return on equity.

XP Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming XP's revenue will grow by 13.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 27.8% today to 25.8% in 3 years time.
• Analysts expect earnings to reach R$6.1 billion (and earnings per share of R$11.32) by about March 2028, up from R$4.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, up from 10.4x today. This future PE is lower than the current PE for the US Capital Markets industry at 19.9x.
• Analysts expect the number of shares outstanding to decline by 1.99% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

XP Future Earnings Per Share Growth

Risks

• The company anticipates a potential contraction in DCM volumes, which may affect revenue growth if not offset by market share gains. This uncertainty could pressure revenues and complicate achieving their growth objectives.
  
• Increasing headcount and internal advisors could strain operating margins if associated costs outpace revenue growth or if productivity improvements do not materialize as expected.
  
• The cross-sell initiatives, including new products like credit cards and insurance, are heavily reliant on penetrating an already existing customer base. If these initiatives face strong competition from current providers used by IFAs, revenue growth could be slower than anticipated.
  
• Risks in the broader macroeconomic environment, such as high interest rates, could impact the company's ability to sustain its fixed income business growth and consequently affect overall revenue and profitability.
  
• Elevated capital needs and risk-weighted assets growth outpacing organic capital generation may constrain the ability to maintain targeted payout ratios and could necessitate adjustments to future capital return strategies, impacting net margins and shareholder returns.

Valuation

• The analysts have a consensus price target of $17.592 for XP based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $24.67, and the most bearish reporting a price target of just $13.36.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$23.7 billion, earnings will come to R$6.1 billion, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $14.96, the analyst price target of $17.59 is 15.0% 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.