Brazil is changing. His policy is unstable. Inflation is skyrocketing. Its currency is weakening. Yet now is the time to buy XP, Brazil’s answer to
XP stock (ticker: XP) fell 38% from its 52-week high of $51.17 in September as the Brazilian currency weakened, while inflation has gone upforcing the Banco Central do Brasil to raise interest rates. There is also an election pitting current President Jair Bolsonaro against former President Luiz Inácio Lula da Silva to make matters even murkier.
Nothing lasts forever, including the forces that stood against XP. Interest rates in Brazil are expected to peak, according to Charlie Wilson, portfolio manager at Thornburg Investment Management, while inflation and political noise surrounding the upcoming presidential election are expected to diminish. That makes XP a solid opportunity right now, he says.
The opportunity begins with the Brazilian financial system. It’s dominated by four big banks that have historically offered a limited range of investment choices, mostly focused on fixed-income securities, Wilson says. He estimates that 90% of assets invested in Brazil are in fixed income securities, while only 10% are in equities. Investors will be looking for new opportunities, Wilson says.
All of this should position XP to continue growing, he says. “As investors seek out new investment options, XP provides them with the best all-round platform to move into new investment categories,” says Wilson. Thornburg, an investment manager with $46 billion in client assets, invests in XP through the
Thornburg Developing Global Fund
XP provides low-cost financial products and services in Brazil, including equities and fixed income, mutual funds and hedge funds, structured products, life insurance, pension plans and equity funds. real estate investment (REIT). The São Paulo company has expanded its banking offerings to include credit cards, secured loans and digital bank accounts. It also offers investment banking services such as equity and debt capital markets, Wilson says.
Most XP customers are affluent, and the fintech plans to offer more investment and banking/credit alternatives, digital assets, as well as business services, a spokesperson said. As it grows, Wilson expects XP to expand into more income brackets. “The next stage of growth is to run Schwab’s playbook to bring new financial services to these customers,” Wilson says.
By 2025, Wilson expects 25% of XP’s revenue to come from new products like life insurance, margin lending (unsecured lending), credit cards and pension fund management .
XP’s open architecture allows it to offer its own products, as well as those of managers outside of its platform, Wilson explains. XP fees are “significantly lower” than what banks charge for their products, he says. On some trading platforms, XP does not charge trading commissions, similar to how several US online brokers have moved to zero commission fees for online trades, Wilson explains. “They have
type platform products for retail investors where they can trade for free,” he says.
Despite the low fees, XP is very profitable and growing. This went public in December 2019, raising $1.96 billion. At that time, the company gave mid-term guidance of 18% to 22% net margins, but it still provided a 25% to 30% net margin, Wilson says. The business has since grown. It reported 3.4 million active customers as of December 31, up from 2.8 million the previous year. XP’s assets under management increased by 23% to reach 815 billion reais ($176.4 billion) in assets under management in 2021, compared to 660 billion reais ($142.8 billion) AUM in 2020.
XP has increased its revenue by an average of 25% each year, Wilson says. The company generated 12.1 billion reais ($2.6 billion) in net revenue in 2021 and Wilson expects it to reach 16.7 billion reais ($3.6 billion) in 2022 “We believe they can generate 31.6 billion reais ($6.8 billion) in revenue by 2025,” he says.
Wilson thinks XP can earn around $1.80 per share by FY2023. He has a price target of $55 by FY2023, up 80% from Wednesday’s close. of $30.50. “We believe XP should be able to achieve this price target within the next 12 months,” Wilson says.
You can bet on it.
Write to Luisa Beltran at [email protected]