XP Stock Is Skyrocketing - Is It Too Hot to Handle?

Capital Markets company XP is standing out today, surging to $14.77 and marking a 5.7% change. In comparison the S&P 500 moved only 2.3%. XP is -48.46% below its average analyst target price of $28.66, which implies there is more upside for the stock.

As such, the average analyst rates it at buy. Over the last year, XP has underperfomed the S&P 500 by 30.1%, moving -46.7%.

XP Inc. provides financial products and services in Brazil. The company is included in the financial services sector, which includes a wide variety of industries such as credit services, mortgage, banking, and insurance. Owing to this variety and the fast pace of innovation within these industries, investors may struggle to make sense of this sector.

As evidenced by the financial meltdown of 2008, seemingly healthy financial services companies — from insurers to investment banks — may see their market value plunge to zero in a matter of months. While the financial crash was likely a once-in-a-generation event, it highlights the volatility that is inherent to the sector. Financial innovation creates opportunities, but also new types of risk that investors and even the companies themselves may not fully understand.

XP's trailing 12 month P/E ratio is 12.3, based on its trailing EPS of $1.2. The company has a forward P/E ratio of 10.0 according to its forward EPS of $1.47 -- which is an estimate of what its earnings will look like in the next quarter.

As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US financial services companies is 13.34, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

To better understand the strength of XP's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:

Date Reported Total Revenue ($ MM) Operating Expenses ($ MM) Operating Margins (%) YoY Growth (%)
2021-12-31 6,802 1,137 -26.43 -219.2
2020-12-31 5,503 688 -8.28 -370.59
2019-12-31 3,958 607 3.06 n/a
  • Average operating margins: -10.5 %
  • Average operating margins growth rate: -294.9 %
  • Coefficient of variability (lower numbers indicate less volatility): 141.0 %

XP's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:

Date Reported Cash Flow from Operations ($ MM) Capital expenditures ($ MM) Free Cash Flow ($ MM) YoY Growth (%)
2021-12-31 -4,020 -353 -4,373 -458.71
2020-12-31 1,511 -292 1,219 130.67
2019-12-31 -3,814 -161 -3,975 n/a
  • Average free cash flow: $-2,376,528,666.70
  • Average free cash flown growth rate: -164.0 %
  • Coefficient of variability (lower numbers indicating more stability): 131.3 %

If it weren't negative, the free cash flow would represent the amount of money available for reinvestment in the business, or for payments to equity investors in the form of a dividend. While a negative cash flow for one or two quarters is not a sign of financial troubles for XP, a long term trend of negative or highly erratic cash flow levels may indicate a struggling business or a mismanaged company.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.

XP's P/B ratio of 0.5 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock. The average P/B ratio of the Financial Services sector was 1.95 as of the third quarter of 2022.

XP is by most measures fairly valued because it has a very low P/E ratio, an exceptionally low P/B ratio, and irregular and negative cash flows with a downwards trend. The stock has poor growth indicators because it has a an inflated PEG ratio and is not profitable. We hope you enjoyed this overview of XP's fundamentals.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.