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Brazilian Broker XP in Growth Mode

The company is putting on assets and clients quarter by quarter

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Holmes Osborne, CFA
May 11, 2021
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XP Inc. (

XP, Financial) is a Brazilian brokerage firm that is in extreme growth mode. The company is taking on new customers and assets under management are soaring. The stock trades for $43.57, there are 559.06 million shares and the market cap is $24.4 billion. XP trades on the New York Stock Exchange.

First-quarter growth has been phenomenal. Client assets grew 96% to 715 billion reals ($136.6 billion). Revenue was up 50% to 2.8 billion reals. The number of clients grew 45% to 3 million. Net income was up 85% to 734 million reals.

Sales were 3.2 billion reals in 2018, 5.5 billion reals in 2019, 8.7 billion reals in 2020 and Morgan Stanley's estimate is 12.2 billion reals for this year. Earnings per share were 25 cents in 2018 and are expected to be 97 cents this year. Outstanding shares have only grown from 509 million to 559 million over that time frame. Not bad. Morgan Stanley has a target price of $66. The bank thinks 2022 earnings will be $1.30.

Major shareholders include the founders, Great Atlantic and Itau Unibanco (

ITUB, Financial). There is an annoying dual share class structure that gives the public less of a vote at shareholder meetings. Itau is selling off its large stake.

So why is the stock so cheap? Probably with negative news surrounding Brazil. Crime, violence, graft presidents and top CEOs getting thrown in jail. According to a Barron's article that came out in December, Dana White of Columbia Threadneedle stated, "Half the companies we own in Brazil weren't listed four or five years ago. There's a negative story around Brazil we just don't agree with."

I visited an XP office in Fortaleza Brazil, last fall. It's about what you'd find in the United States. The company has mutual funds, Visa cards, can buy stocks, managed money (which means stock portfolios managed by professionals) and various other things. Obviously it's not as robust as Charles Schwab (

SCHW, Financial) or Fidelity (FIS, Financial), but XP is gaining breadth every year.

The financial industry in Brazil is incredibly bureaucratic and inefficient. I've had instances where there are four ATMs and only one will accept my American debit card. People have to wait for hours at a time to be seen at banks. My theory is that XP will continue to steal market share from the big players. So far, this theory has been working out.

And now for the risks. Brazil is a notoriously tough place to do business. I mentioned above about graft and corruption. President Jair Bolsonaro recently named General Joaquim Silva e Luna as the next CEO of Petrobras (

PBR, Financial). The general has no prior knowledge of the energy industry.

The Brazilian real has been weak with other Latin American currencies. It takes 5.22 real to buy one dollar. In 2017, it took about 3. I thought higher commodity prices would bolster Latin American currencies. So far, it appears it has not.

Another risk is "black box investing." As with all financials, there could be some hidden issues. I see and abundance of derivatives on the balance sheet. These are funky and hard to understand.

I like XP. It's in growth mode. I also like having some money diversified into Brazil as it's an emerging market. We're at a small loss but we continue to hold.

Disclosure: We own shares.

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