Investment Thesis

In my previous write-up covering the company, I maintained a Bullish view sighting XP Inc.’s (NASDAQ:XP) leading market position and its solid execution, even as the business faced headwinds from elevated interest rates in Brazil. I found its valuation appealing based on the 2026 financial targets presented during last year’s Investor Day. Its Q2 results further demonstrated solid execution as the company remains well on track to meet these targets. With Brazilian interest rates now at 10.5%, down from its peak at 13.75%, consistent growth can be expected in the coming quarters. The company’s continued success in cross-selling its newer products remains a key growth driver. In a conservative scenario, I anticipate XP will achieve the midpoints of its 2026 targets. I have a price target of $30/share by 2026 which represents a compelling 60% upside from the current price. Therefore, I continue to be bullish on XP stock.

Earnings Highlights and My Expectations Looking Ahead

Q2 was a solid quarter for XP as it demonstrated strong revenue growth and operating leverage. Gross Revenue increased 21% year over year to R$ 4.05 billion, with gross margins improving significantly to 69.7%, versus 67.7% in the prior year period. EBT margins also rose sharply to 32.8% in the quarter, versus 27.3% in the prior year period. Given these strong results, the company remains on track to meet its 2026 financial targets shown below.

One of the key factors driving this strong performance was the successful cross-selling of newer product offerings such as Insurance and Cards, which saw year-over-year increases of 52% and 35%, respectively. Additionally, the decline in interest rates in Brazil has positively impacted the business. Management’s strict control over operating expenses has also contributed to this success, with expenses decreasing as a percentage of revenue, as detailed below. This has resulted in impressive EBT margins of 32.8% for the quarter, aligning well with management’s medium-term target range of 30% to 34%.

Given the company’s strong balance sheet, which comprises a Net Asset Value (NAV) of R$9 billion ($1.5 billion), management is returning capital to shareholders through buybacks. I do consider this an attractive choice for capital allocation given where shares are currently trading, while I also expect a special dividend to be paid out in Q4.

Addressing Some Investor Concerns

A major concern for investors recently has been the competitive risks facing XP’s business. However, as shown in the data above, the Net New Money inflow, a key metric for assessing the company’s competitive advantage and growth potential, was 44% higher year over year. This substantial uptick, compared to recent quarters, suggests a strengthening of XP’s market position, and I anticipate this positive trend will continue in the coming quarters. Discuss the company’s strong performance amidst a competitive environment, its CEO stated:

The question has been always, okay, now the banks or the competitors, they have closed the gaps, you guys have lost the competitive advantage. And we always said, no, it’s something that’s temporary. At some point with everything that we are doing we will revert that, I believe, that’s the beginning. So of this new levels, of course, we are not happy with the 2024 that we deliver right now. We are working very hard to go back to higher levels, but it may take some time.

Moreover, XP’s management team appears confident that the company can sustain this level of performance even if interest rates to do continue to fall. XP’s CEO highlighted the resilience of the business, stating:

So again, we always said that we don’t need like a much better macro environment and we don’t need interest rates like to go to 8%. We don’t need like a stock exchange to perform well, like to go back to bring net new money.

XP’s annualized retail take rate, which has been under pressure due to the higher interest rate environment, was 1.29% in Q2, showing an improvement from 1.24% in Q1 and remaining relatively stable year over year. I do not expect this trend of declining take rate to be a significant headwind for future growth.

Valuation

Given the company’s trajectory towards achieving its 2026 financial targets, I find it prudent to base its valuation on these expectations. I expect that the company will reach the midpoints of management’s 2026 targets, which would result in revenue of R$25 billion and EBT of R$8 billion, reflecting a margin of 32%. At a currency conversion rate of R$1=$0.18, this equates to $4.43 billion in revenue and $1.42 billion in EBT, with an anticipated Net Income of $1.1 billion after taxes.

Applying a multiple of 13 on its 2026 earnings yields an enterprise value of $14.3 billion and a market capitalization of $15.8 billion, when including its NAV of $1.5 billion. This results in a 2026 share price target of $30, representing a substantial upside of over 60%. A multiple of 13 is considered reasonable, particularly as it is a substantial discount compared to US peers like Charles Schwab (SCHW), which trades at an earnings multiple above 20, despite slower growth. While BTG Pactual, XP’s competitor trading on the Brazilian stock exchange, trades at a multiple of around 11, I believe XP deserves a premium in its valuation multiple due to its higher growth rate, strong balance sheet, and superior Return on Equity (ROE).

Risks to Consider

Macroeconomic headwinds

XP’s business is sensitive to fluctuations in the Brazilian economy, particularly changes in interest rates. Though interest rates have come off considerably from their peak levels, they continue to remain at elevated levels. Management has previously noted that meeting the 2026 targets would become exceptionally challenging if rates were to rise again, a scenario that the Brazilian Central Bank has indicated could be a possibility.

Heavy competition for customers and IFAs

XP faces substantial competition from well-established players like BTG Pactual and Itaú Unibanco (ITUB). Additionally, fintech companies such as Nubank (NU) represent a significant threat to XP’s retail segment. Despite these competitive pressures, as discussed earlier, XP has demonstrated resilience and continued success in navigating this challenging landscape.

Higher tax rate due to revenue mix

The company’s tax rate on earnings has been rising in recent quarters, driven by revenue growth from newer segments like Corporate Services, which is outpacing other segments. This increase has been factored into my valuation model. However, investors should remain mindful of its potential impact moving forward.

Buy XP Stock

XP’s Q2 results affirm that the company is on track to meet its 2026 financial targets. While I recognize the risks associated with investing in XP, I have also highlighted reasons for remaining confident in the business. Based on my estimates, the price target of $30/share by 2026 suggests significant upside potential from current levels. Consequently, I maintain a Buy rating on XP stock.