Those of you who read my letter “Top Brazilian Fintech companies trading on US stock exchanges”, would know about my fascination with Brazilian Fintech companies. Brazil is the home of Nubank, Banco Inter, Stone, PagSeguro…and XP Investimentos (NASDAQ: XP 0.00), a modern brokerage that successfully competes with incumbent players.

While writing this profile, I was contemplating titling it “a blueprint for building a modern brokerage” because I strongly believe there is so much to learn from XP. During the 2018-2021 period, the company’s client base, Assets Under Custody, and revenue grew at a Compound Annual Growth Rate of over 50%…and the company has consistently delivered a 25%+ Net Income and a 35%+ Adjusted EBITDA margin. Somehow, XP figured out the magic sauce for delivering impressive growth while maintaining consistent profitability.

Without further ado…let me introduce you to XP Investimentos!

Please note that the company reports in Brazilian Reals (denoted in the text below as R$), and as of this writing, the exchange rate to USD was R$5.26.

Business Overview

In their own words, “XP is a leading, technology-driven platform and a trusted provider of low-fee financial products and services in Brazil.” At its core, the company is a brokerage providing over 3.5 million individuals, small and medium-sized businesses, and corporations with access to financial instruments via its three brands: XP Investimentos, Clear, and RICO. XP’s customers can trade over 800 financial instruments, including securities, fixed-income instruments, mutual funds, and real estate investment trusts (REITs).

In addition to supporting self-directed investing via the web and mobile apps (“XP Direct”), the company provides private banking services to high-net-worth individuals and family offices (“XP Private”), as well as trading desks and securities and debt placement services for its corporate clients. The company also operates a network of Independent Financial Advisors (IFAs), as well as multiple financial media and educational properties. The company reports its results under four segments: “Retail”, “Institutional”, “Issuer services” and “Digital Content”.

XP continues actively investing in expanding and improving its core business. Thus, in 2022 the company started offering its clients access to the U.S. stock market (“XP International”) and foreign currency exchange, as well as Bitcoin and Ether trading (“XTAGE”). As you will see later in the text, the company is highly profitable and has the capacity to invest in new products and services.

XP is also actively diversifying its product range and revenue stream. Thus, the company started offering digital banking accounts, credit cards, collateralized personal loans, pension plans, and insurance. These initiatives, referred to as “New Verticals”, contribute just over 7% of the company’s revenues, but exhibit triple-digit growth. The company doesn’t limit itself to reselling products from other companies, and besides acting as a broker, does underwrite loans, manages pension plans, and underwrites insurance policies.

Finally, at the beginning of 2022, the company agreed to acquire Banco Modal, one of its competitors serving approximately 500,000 customers. The acquisition is expected to close by the end of the year and is subject to regulatory approvals.

Active Clients

XP reported 3.6 million clients at the end of Q2 2022, and although the growth slowed in the last 12 months, the long-term trend is nothing short of impressive. Thus, the company’s client base grew at the Compound Annual Growth Rate (CAGR) of 56% during the 2018 - 2021 period.

For comparison, at the end of 2021, Banco Inter and Nubank, the company’s closest competitors (outside of traditional banks), reported 2.0 million and 6.3 million clients using their investment products. As a reminder, Nubank completed the acquisition of Easyinvest in June, 2021, and rebranded it into NuInvest.

XP defines an “active client” as an individual, a small and medium-sized enterprise, or a corporation that either had AUC above R$100 or has transacted at least once in the last thirty days. The metric includes clients served by XP, Rico, Clear, and XP Investments brands.