XP Inc. (XP)

Executive Summary / Key Takeaways

• XP Inc. is executing a deliberate transformation from Brazil's leading brokerage into a comprehensive financial ecosystem, using its fixed-income dominance as a foundation to cross-sell higher-margin products while building a fee-based advisory model that now represents 21% of retail assets under custody.
• The company's Q3 2025 results reveal a critical balancing act: corporate and issuer services hit a record BRL 729 million (+32% YoY) on strong capital markets activity, while retail fixed-income revenues face take-rate compression from client preference for daily liquidity products, demonstrating how scale growth can mask margin pressure.
• XP's fortress balance sheet, with CET1 at 18.5% versus a 12% peer average and a BIS ratio of 21.2%, provides strategic flexibility to invest through Brazil's volatile macro cycles while returning over 50% of net income to shareholders through buybacks and dividends.
• Management's guidance for 30-34% EBT margins by 2026 hinges on successfully scaling new verticals—credit cards, insurance, retirement plans, and global investments—while maintaining BRL 20 billion in quarterly retail net new money, a target that requires flawless execution on advisor productivity and client segmentation.
• Trading at 11.3x earnings and 3.1x free cash flow, XP appears significantly undervalued relative to its 22.5% ROE and dominant market position, but the investment thesis carries execution risk as the company navigates take-rate headwinds and prepares for potential volatility from 2026 elections.

Setting the Scene: From Cayman Islands Disruptor to Brazil's Investment Infrastructure

XP Inc. began in 2001 as a Grand Cayman-based startup with a singular mission: democratize Brazil's oligopolistic investment industry through an open, comprehensive product platform. This founding DNA explains the company's current strategy. While traditional Brazilian banks hoarded products and charged premium fees, XP built the largest independent financial advisor network in the market, creating a distribution moat that now captures 60% of net new money through channels launched just four years ago. The company has evolved from a pure brokerage into what management calls an "all-weather ecosystem," integrating retail, institutional, and corporate divisions while layering on banking, insurance, and wealth planning services.

XP operates in a uniquely challenging macro environment. Brazil's Selic rate currently sits at 14-15%, the highest cycle in nearly two decades, which has fundamentally altered client behavior. Retail investors now park 65% of assets in fixed-income instruments, preferring daily liquidity products that generate lower take rates but higher volumes. This structural shift explains why XP's fixed-income assets under custody doubled over two years while its overall take rate compressed 20 basis points. The company isn't fighting this trend—it's leveraging its position as Brazil's largest fixed-income market maker to capture assets, then cross-sell higher-margin products.

The competitive landscape reveals XP's strategic positioning. BTG Pactual operates as an integrated investment bank with superior corporate banking capabilities and 47.9% operating margins, but its model is capital-intensive and less scalable in pure retail. Nu Holdings dominates with 127 million clients and 39.8% profit margins, yet its investment platform remains secondary to its banking core. Inter & Co (INTR) focuses on credit innovation with 29% revenue growth but lacks XP's investment platform depth. XP's moat lies in its agnostic, open architecture that serves clients through multiple channels—internal advisors, independent advisors (IFAs), RIAs, and self-directed—while competitors remain constrained by single-channel models.

Technology, Products, and Strategic Differentiation: The Platform Advantage

XP's core technology isn't just a trading interface; it's a comprehensive ecosystem that increases advisor productivity by 11 times through proprietary AI-powered CRM, allocation platforms, and sales activity management. This matters because it transforms advisors from transactional agents into relationship managers, driving a 19% reduction in client churn and 14% higher adherence to recommended allocations. The company has built what it calls "the third wave" of service delivery—personalized wealth planning previously reserved for high-net-worth clients now scaled to those with as little as BRL 300,000 through AI-driven tools.

The fee-based advisory model represents XP's most significant strategic pivot. At 21% of retail AUC, this model generates slightly lower take rates but captures significantly higher wallet share, resulting in neutral revenue impact while creating stickier, more predictable income streams. Management expects this to reach 50% of assets, mirroring developed markets like the U.S., which would fundamentally transform XP's earnings quality. The shift is accelerating beyond wealth management into the broader retail segment, suggesting a structural industry change that XP is pioneering.

New verticals demonstrate the ecosystem's expanding monetization. Credit card TPV grew 9% YoY to BRL 13.1 billion, with new affluent and private banking products launched in Q2 2025 expected to accelerate growth. Life insurance written premiums surged 25% YoY, while retirement plan assets reached BRL 90 billion (+15% YoY). These products carry higher margins than traditional brokerage and deepen client relationships. The consortium business, started from scratch in 2024, is gaining traction by offering structured credit at implied interest rates that are accretive for clients, creating another revenue layer without balance sheet risk.

Financial Performance & Segment Dynamics: Evidence of Strategy Working

XP's Q3 2025 gross revenues of BRL 3.7 billion in retail (+6% YoY) mask a more complex story. The growth was driven by floating income from higher interest rates and volumes, plus strong new verticals performance, but fixed-income take-rate compression of 20 basis points reveals margin pressure from product mix shifts. Daily liquidity products now represent 45% of new allocations versus 25% previously, a structural change that reduces revenue per dollar of AUC but increases asset stickiness. This trade-off highlights XP's prioritization of long-term asset retention over short-term revenue maximization—a strategic choice that will test investor patience.

The corporate and issuer services segment's record BRL 729 million performance (+32% YoY) provides critical diversification. DCM market share reached 10% despite industry headwinds, while corporate revenues surged 77% YoY to BRL 406 million on strong hedging solutions for debt issuers. This segment operates on higher margins than retail brokerage and is less sensitive to retail trading volumes. The BRL 33 billion corporate securities book, maintained at similar size to last quarter, positions XP to sell to retail clients in 2026 when corporate issuance may slow due to election volatility, creating a unique inventory advantage.

Capital efficiency metrics demonstrate operational leverage despite heavy investment. The efficiency ratio improved 79 basis points YoY to 34.7%, while SG&A expenses grew only 10% YoY despite hiring nearly 500 employees. This cost discipline, combined with revenue growth, expanded the EBT margin 47 basis points YoY. The 23% ROE, though flat YoY, remains robust, and would have reached 24% if not for the BRL 1 billion buyback program announced post-quarter. This capital generation capacity, with ROTE at 28% before distributions, proves the model's profitability even during investment phases.

The balance sheet strength is extraordinary. CET1 at 18.5% is more than 600 basis points above peer averages, while the BIS ratio of 21.2% provides BRL 108 billion in risk-weighted assets capacity. This strategic flexibility allows XP to warehouse corporate securities during opportune periods—like Q4 2025 ahead of expected 2026 volatility—without regulatory constraint. The company has returned BRL 10 billion in dividends and buybacks over recent years, with a 74% payout ratio in 2024, yet capital ratios continue growing, demonstrating genuine excess capital generation.

Outlook, Management Guidance, and Execution Risk

Management's guidance for 2025 revenue growth "more than 10%" appears conservative given Q3's momentum, but reflects awareness of challenging comparables from 2024's strong capital markets. The target of BRL 20 billion quarterly retail net new money is achievable—Q3 delivered BRL 20 billion despite macro headwinds—supported by channel diversification where new distribution models account for 60% of inflows. However, the flat take-rate assumption for 2025 implies continued pressure from fixed-income mix shifts, meaning revenue growth must come entirely from AUC expansion and new verticals.

The 30-34% EBT margin target by 2026 represents the critical execution milestone. Management acknowledges that margin expansion will be "flattish" in coming quarters due to investments in sales force expansion, technology, and new products. This transparency signals a deliberate trade-off: sacrificing near-term margin leverage to build long-term earnings power. The path to 30% margins requires new verticals to scale efficiently, the fee-based model to reach critical mass, and corporate banking to maintain its growth trajectory—all while controlling costs in the core retail business.

Key assumptions underpinning guidance include AUC growth tracking the Selic rate on 65% of assets, plus BRL 80-100 billion in annual net new money. The fee-based model's AUC is expected to reach BRL 100 billion in 2025, up from BRL 40 billion in 2024, which would meaningfully improve earnings quality. However, management's caution that 2025 has proven "more challenging than we estimated" and that they are "pursuing the bottom of the guidance" for 2026 reveals execution uncertainty. The guidance is not a promise but a direction, contingent on maintaining advisor productivity gains and client segmentation improvements.

Risks and Asymmetries: What Could Break the Thesis

Take-rate compression represents the most immediate risk. If clients continue shifting toward daily liquidity products and shorter durations, retail revenue growth could decelerate despite AUC expansion. Management notes that 45% of new allocations now go to daily liquidity products versus 25% historically, a trend that could persist if interest rates remain elevated. This would pressure margins unless offset by faster new verticals growth, creating a race between volume and profitability that could disappoint investors expecting margin expansion.

Corporate issuance volatility poses a significant 2026 risk. Management explicitly warns that elections will likely bring "increasing volatility and therefore, a reduction in corporate clients' appetite for new offerings." While XP plans to increase its BRL 33 billion corporate securities book in Q4 2025 to sell to retail in 2026, this inventory strategy carries mark-to-market risk if credit spreads widen. The DCM business, which drove Q3's record performance, could face a sharp slowdown, making new verticals growth even more critical to hitting revenue targets.

Regulatory uncertainty around tax-exempt instruments remains a wildcard. Potential changes to taxation of LCI/LCA products could trigger massive reallocation, impacting both retail flows and corporate issuance patterns. While management downplays direct impact, noting XP's product innovation can adapt, any regulatory shock could disrupt the carefully calibrated ecosystem. The 4966 resolution's positive impact on capital ratios demonstrates that regulatory changes can be beneficial, but the asymmetry works both ways.

Competitive dynamics are intensifying. BTG Pactual's 37% revenue surge in Q3 2025 and its integrated banking model create pressure on both pricing and talent. Nu's 127 million client base and aggressive cross-sell into investments threaten XP's mass-market acquisition. The Banco Master liquidation, which affected XP, BTG, and Nu equally, revealed distribution risks that could increase regulatory scrutiny and compliance costs, disproportionately impacting smaller platforms.

Valuation Context: Discounted Platform Value Amid Execution Discount

At $19.72 per share, XP trades at 11.3x trailing earnings and 3.1x free cash flow, metrics that appear anomalously low for a company generating 22.5% ROE and 29.4% profit margins. The P/B ratio of 2.34x compares favorably to BTG's 20.9x and Nu's 8.0x, suggesting the market assigns minimal premium to XP's asset base despite its superior capital efficiency. This valuation gap reflects investor skepticism about take-rate sustainability and execution risk on the ecosystem strategy.

Cash flow metrics reveal exceptional quality. Operating cash flow of $2.09 billion on $3.72 billion revenue (56% conversion) and free cash flow of $2.03 billion demonstrate that reported earnings are real and distributable. The 3.1x P/FCF multiple is extraordinarily low for a company growing AUC at 16% YoY, suggesting either market inefficiency or deep-seated concerns about future profitability. The 0.91% dividend yield combined with aggressive buybacks (BRL 2 billion in 2025) indicates management views capital return as the best use of funds, but also that growth investments are not consuming cash.

Relative to peers, XP's valuation appears misaligned with fundamentals. BTG Pactual (BPAC3.SA) trades at 87.9x earnings despite 28.1% ROE, reflecting its diversified banking model and superior growth (37% revenue surge). Nu (NU) commands 33.4x earnings with 27.8% ROE, pricing in its massive scale and digital banking dominance. XP's 11.3x multiple suggests the market views it as a cyclical brokerage rather than a platform company, creating potential upside if the ecosystem strategy delivers promised margin expansion.

The balance sheet quality supports higher valuation. Net debt is negative (effectively net cash) with a debt-to-equity ratio of 7.7x that reflects regulatory capital requirements rather than leverage risk. The 18.5% CET1 ratio provides a 600+ basis point buffer over peers, implying XP could return an additional BRL 6-8 billion to shareholders without breaching regulatory minima. This excess capital, combined with the 42.75% payout ratio that management targets above 50%, suggests significant capital return acceleration is possible once the ecosystem investments mature.

Conclusion: Platform Premium Waiting to Be Recognized

XP Inc. has engineered a strategic transformation that positions it as Brazil's most complete investment ecosystem, leveraging fixed-income dominance to capture assets while building higher-margin verticals that can deliver 30-34% EBT margins by 2026. The Q3 2025 results validate this approach—record corporate revenues demonstrate pricing power in capital markets, while retail net new money of BRL 20 billion proves asset gathering remains robust despite take-rate headwinds. The company's fortress balance sheet, with CET1 600 basis points above peers, provides the firepower to navigate Brazil's volatile macro environment and capitalize on 2026 election-driven opportunities.

The investment thesis hinges on execution of the fee-based model and new verticals scaling. Management's guidance assumes flat take rates and continued AUC growth at Selic-linked rates, meaning revenue expansion must come from cross-sell and corporate banking. The 21% fee-based AUC penetration, while accelerating, remains far from the 50% target needed to transform earnings quality. Success will be measured by whether XP can maintain BRL 20 billion quarterly net new money while expanding credit card penetration beyond 29% of eligible clients and insurance penetration beyond 2%.

Trading at 11.3x earnings and 3.1x free cash flow, the market prices XP as a cyclical brokerage rather than a platform company. This valuation discount creates asymmetric upside if the ecosystem strategy delivers even the lower end of margin guidance. The key variables to monitor are advisor productivity gains from AI tools, fee-based AUC growth trajectory, and corporate securities book turnover through the 2026 election cycle. If XP executes, its capital return capacity and margin expansion should drive significant multiple re-rating, rewarding investors who recognize the platform value beneath the brokerage surface.