XP Inc. (XP): The Charles Schwab of Brazil

Is Growth in XP Moderating?

XP is a leading, technology-driven platform and trusted provider of low-fee financial products and services in Brazil. The company’s mission is to disintermediate the legacy model of traditional financial institutions by:

• Educating new classes of investors

• Democratizing access to a wider range of financial services

• Developing new financial products and technology applications to empower clients

The company operates in a similar way to Charles Schwab but in Brazil. XP provides (1) financial advisory services all types of retail and institutional clients in Brazil and (2) an open financial product platform for more than 800 investment products across various asset classes.

Source: XP Institutional Presentation

XP was founded in 2001 and began its real growth trajectory in 2012 when it received a capital investment from General Atlantic and Dynamo. Since then, XP acquired a couple of companies and received a larger investment in 2017 from Itau Unibanco (NYSE: ITUB) for a 49% stake. The company floated the largest IPO of a Brazilian company at the time in 2019 on NASDAQ, valued at $10.5 billion (in today’s USD).

Currently, XP trades at a $6.9 billion market cap (USD). The company has grown client assets at a 24.3% CAGR since its IPO in 2019, and a 51.3% CAGR since its original 2012 investment. XP has launched various new investment products since its IPO and has grown into a full financial services ecosystem for retail and institutional clients.

Ownership Structure

In July 2023, XP terminated the shareholders’ agreement it had with ITUB, one of its primary competitors, and increased the number of independent directors on its Board. Currently XP Control LLC, effectively a coalition of major stakeholders operating under a unified governance agreement, owns 19% of shares outstanding yet 70% of voting rights. Some of these stakeholders include founding members of XP, Itau (ITUB) and General Atlantic.

Lines of Business

XP operates across four lines of business.

1. Retail Investments

This product line includes equities, fixed income and a funds platform from XP Asset Management and third-party asset managers. XP holds a 50% market share for individuals in the BMF and Bovespa exchanges of Brazil.

2. Retail Financial Services

This product line includes:

• Distribution of P&C and life insurance from third-party and proprietary sources

• $12.5 billion (USD) in client assets from in-houe and third-party asset managers distributed on the platform

• Over 1 million active XP-branded credit and debit cards

• More than $3 billion (USD) credit portfolio, 90% of which is collateralized with investments on the XP platform

3. Institutional

This product line includes a wide range of products and services for domestic and international clients including family offices, insurance companies, corporate treasuries, pension funds and asset managers. Products across all asset classes are offered.

There is also an opportunity for geographic expansion outside Brazil.

4. Corporate & Issuer Services

This line represents a complete capital market solution to corporate clients with revenue exceeding $100 million. XP provides issuer services for capital markets as well as M&A advisory.

Is Growth Tapping Out?

XP has experienced very strong growth over the past several years. Client asset growth remained strong, but I noticed that the number of active clients in the graphic below has leveled off. Growth in the credit portfolio and cards has also leveled off.

Source: XP Presentation

After some research and conversation with a fund manager I know in Brazil, I came to the conclusion that the market in Brazil may be saturating for XP and its competitors. I see growth ahead but am unsure how strong that growth will be. I am interested in seeing how XP performs on these KPIs over the next few quarters before deciding to invest in this company.

It is important to note that revenue growth remained strong to date across most product lines. This suggests to me that XP is able to cross-sell more to its existing customers in the face of fewer new clients. This can work for a while but the old vector for substantial new client growth may be weakening.

I still consider the company because its profile is stellar, and it has a great product.

• 26% Net Income Margins

• 12.6% Diluted EPS CAGR over the last two years

• Steadily declining SG&A margin

• 28.4% ROTE

• 8.4x NTM P/E

It is also conceivable that the company may someday venture outside Brazil for additional growth like some of its competitors such as Nubank.

Other Brazilian Lenders

There is a lot of chatter on social media platforms about other Brazilian fintech companies such as Nubank ($NU), which also have fast growing credit portfolio. Nubank trades at a price multiple more than double that of XP. Granted it is growing much faster than XP but it comes at a higher risk.

Below is the table of overdue loans for XP. It is 1.5% of total receivables.

Source: XP Q3 2024 Filing

Compare that to NuBank’s past due receivables shown below which equal about 12% of loans, up from 10% the year prior. The first image below is for installment loans. The second image is for

Source: Nubank Filing

Competitors like Nubank are aggressively lending, even outside Brazil, to the lowest quality and least experienced borrowers. This social media darling is outperforming but if broad distress begins to materialize, NU will get hit harder on the downside.

Conclusion

XP has experienced tremendous growth yet there are a few signs of moderation. This stock trades at a 8.5x NTM P/E so the valuation is attractive given its projected earnings growth of about 12% CAGR over the next two years. I would like to monitor this company but not make an investment at this time. There are some risks to consider below.

Risks:

• FX Risk: The company trades in USD on the NASDAQ but the majority of its operations and assets are denominated in Brazilian Real. Brazil is a developing economy and its exchange rate with the USD has been weakening over time. I don’t see Brazil becoming the next Venezuela but keep in mind the currency translation risk for this stock. This could be one reason companies such as NU and XP have sold off recently.

• Growth and saturation: There is still growth ahead for XP and penetration into new markets within Brazil. However, consider the moderating future growth alongside the currency risk when evaluating this low multiple stock.

• Voting Shares: XP is tightly controlled by its founders and early PE-backed investors. Insiders and early PE investors own at least 20% of the company shares but control more than 70% of the voting power due to the dual class structure.

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Disclosure: This information is provided for informational purposes only and should not be considered a solicitation or recommendation to buy or sell any securities. The author or entity providing this information may hold positions in the securities discussed. This is not investment advice.