Brazil's Evolving Landscape Will Unlock Broad Market Opportunities

Key Takeaways

• Expansion of Brazil's middle class and tech-driven client migration are expected to drive XP's market growth, client acquisition, and long-term revenue gains.
  
• Diversified products, platform innovation, and regulatory tailwinds should improve operational leverage, encourage cross-selling, and boost profitability.
  
• Mounting competition, structural fee compression, rising costs, negative net new money trends, and regulatory risks threaten XP's growth, profitability, and ability to sustain margins.

Catalysts

Provides financial products and services in Brazil.

• The ongoing expansion of Brazil's middle class and gradual increase in personal savings rates are set to grow XP's addressable market, supporting long-term AUM and retail client growth-which should bolster revenue and earnings power as the company penetrates deeper into emerging segments.
  
• The rapid client migration away from traditional banking to digital and tech-first investment platforms remains underappreciated, with XP's multi-channel ecosystem (IFA, internal advisers, RIAs) poised to capture significant share; this channel diversification and platform stickiness are likely to accelerate net new money inflows and drive sustained revenue growth.
  
• XP's continued diversification of its product suite-including early-stage growth in insurance, retirement, cards, FX, global investments, and the newly launched consortium business-enables deeper client cross-sell and higher revenue per customer, pointing to meaningful top-line expansion and improved earnings resiliency.
  
• Investment in scalable, technology-driven platforms and efficiency enhancements has produced steady improvements in operational leverage and expanding net margins; as XP grows, further margin gains are likely due to disciplined cost structures and self-reinforcing profitability trends.
  
• Regulatory tailwinds in Brazil's capital markets, including reforms that increase transparency and investor protection, are likely to increase retail participation and support the overall volume of investable assets, providing a sustained catalyst for higher assets under custody and future revenue growth.

XP Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming XP's revenue will grow by 15.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 29.3% today to 26.4% in 3 years time.
• Analysts expect earnings to reach R$6.8 billion (and earnings per share of R$12.29) by about August 2028, up from R$4.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as R$6.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.7x on those 2028 earnings, up from 9.5x today. This future PE is lower than the current PE for the US Capital Markets industry at 25.6x.
• Analysts expect the number of shares outstanding to decline by 1.9% 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

• Intensifying competition from large incumbent banks and fintech startups, especially in corporate and SME segments, is pressuring XP's fee structures and impacting corporate net new money inflows, which could constrain revenue growth and net margin sustainability.
  
• Structural shift toward fee-based advisory models-currently only 5% of client assets but expected to rise in Brazil-tends to lower take rates; unless offset by larger share-of-wallet, this could gradually depress average revenue per client and operating margins.
  
• Negative trends in net new money from corporate and institutional clients-driven by macroeconomic liquidity constraints and bank competitors demanding investment reciprocity for credit lines-signal ongoing challenges in capturing and retaining large client assets, impacting AUM/AUA growth and associated fee income.
  
• XP's high and rising investments in marketing, technology, and sales force expansion (highlighted by significant increases in non-people SG&A) elevate operating expenses, which, if not matched by robust revenue acceleration, threaten future profitability and efficiency ratios.
  
• Potential regulatory and tax changes-such as anticipated new rules affecting tax-exempt fixed income instruments and offshore fund taxation-could alter market dynamics, reduce product attractiveness, and slow client investment activity, negatively affecting trading volumes, fee income, and net revenue growth.

Valuation

• The analysts have a consensus price target of $22.232 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 $25.84, and the most bearish reporting a price target of just $19.04.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$25.8 billion, earnings will come to R$6.8 billion, and it would be trading on a PE ratio of 12.7x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of $16.0, the analyst price target of $22.23 is 28.0% 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.