XP Inc.'s Q1 Earnings: Margin Magic or Buyback Mirage?

XP Inc.'s Q1 2025 earnings report has investors grappling with a classic dilemma: strong EPS growth masked by a revenue shortfall, while margin expansion and aggressive buybacks fuel optimism about shareholder value. The results present a paradox worth unpacking. Is XP's financial engineering sustainable, or does the revenue miss hint at deeper structural challenges? Let's dive in.

The EPS-Revenue Split: A Story of Buybacks vs. Market Realities

XP's diluted EPS surged 24% YoY to BRL2.29, driven by a completed BRL1 billion buyback program and the announcement of another BRL1 billion. This reduced the share count, amplifying EPS growth even as gross revenue grew only 7% to BRL4.6 billion—below the 10% annual guidance. The disconnect is stark: margin magic and share buybacks are powering top-line EPS results, but revenue growth remains tepid.

The revenue miss stems from a 7% sequential dip, with the “Other” segment declining 24% YoY (though adjusted for restructuring, operational revenue grew 9%). Meanwhile, the Retail segment's 10% growth to BRL3.4 billion—a bright spot—was offset by softer performance in the Wholesale Bank's Corporate & Insurance Services (up only 11%).

Margin Expansion: Sustainable or a One-Time Win?

The real star here is margin performance. XP's EBT margin jumped 220 bps to 29.1%, while the efficiency ratio hit a record-low 34.1%, reflecting strict cost controls. SG&A expenses stayed flat at BRL1.4 billion despite revenue growth, and operational leverage from cross-selling initiatives (e.g., credit card TPV up 7%, life insurance premiums up 40%) boosted profitability.

Critically, ROE hit 21%, a 340-basis-point jump from Q1 2024, with CET1 capital at 17.3%—well above peers. These metrics suggest XP's cost discipline isn't a fluke. Regulatory tailwinds (Resolution 4966) also reduced risk-weighted assets, easing capital constraints and enabling further margin expansion.

But can this continue? XP aims for 30% ROE by 2026, relying on scaling fee-based wealth management (targeting BRL100 billion in AUM) and leveraging its 19% lower client churn. The 13% revenue growth forecast hinges on these initiatives, but Q1's 7% revenue growth underscores execution risks.

Buybacks, Dividends, and Shareholder Value: A Double-Edged Sword

XP's capital allocation strategy is aggressive: returning over 50% of net income via buybacks and dividends in 2025-2026. The new BRL1 billion buyback program adds to its history of returning over BRL10 billion to shareholders, which directly fueled the EPS beat.

This creates a self-reinforcing cycle: buybacks reduce shares, boost EPS, and justify higher valuations—until they don't. If revenue growth stagnates, the buybacks could become a crutch. Yet XP's net new money surged 79% YoY to BRL24 billion, suggesting organic growth is accelerating. The 17% market share in institutional brokerage and cross-selling wins (e.g., FX, digital accounts) provide tailwinds.

Valuation: Is XP's Stock a Buy at Current Levels?

XP trades at a P/E of 18x forward earnings, slightly above its 5-year average but reasonable given its margin profile and growth targets. The key question: Will ROE hit 30% by 2026? If margins continue expanding (aided by lower capital requirements and fee-based growth), and revenue reaches 13%, the valuation could hold.

Risks include macroeconomic volatility in Brazil, competition from state-owned banks, and regulatory shifts. Yet XP's CET1 ratio (17.3%) and CET1 target range (16%-19%) offer a buffer.

Conclusion: XP's Margin Machine Justifies a Long Position—For Now

The data paints a compelling picture: margin expansion is structural, not cyclical, driven by cost discipline, cross-selling, and tech-driven efficiency. The revenue miss is a speed bump, not a roadblock, given the net new money surge and strategic focus on fee-based models. Buybacks are a double win—they boost EPS and signal confidence in the balance sheet.

Investors should buy the dip here, but keep a close eye on Q2 revenue growth and margin retention. XP's valuation is reasonable, and its capital allocation strategy gives it a strategic edge in a consolidating financial sector. The EPS-revenue disparity? It's a temporary trade-off for long-term value creation.

The verdict? Hold and accumulate, but don't ignore the risks. The margin machine is firing on all cylinders—now let's see if revenue can catch up.