The XP Inc. Downgrade Drama: Can Buybacks and Bulls Overcome the Bears?

Investors in XP Inc. (XPBR31.SA) have been caught in a tug-of-war between optimism and fear since May 20, 2025, when Itau BBA downgraded the Brazilian financial giant to "Market Perform." Let's dissect the chaos: How much weight should you give to analyst sentiment shifts, the company's aggressive buybacks, and the bombshell short-seller allegations?

The Downgrade: A Hit to XP's Narrative

On May 20, Itau BBA slashed its rating for XP Inc. from "Outperform" to "Market Perform," setting a price target of $21—a stark contrast to GuruFocus' bold $58.35 12-month estimate. The downgrade cited near-term headwinds: a 4% quarter-over-quarter revenue decline, stagnant retail inflows, and a one-off spike in expected credit losses (ECL). While XP's fundamentals remain strong—13% AUM growth, record net income, and a 24.1% ROE—the downgrade highlighted execution risks.

The stock closed May 20 at $104.10, down slightly from its open but within a volatile trading range. Analysts argue this reflects a market recalibration—not panic—but the downgrade's timing was ill-fated, coinciding with Grizzly Research's "Madoff-like Ponzi scheme" report.

The Buyback Blitz: Bullish Signal or Desperation?

XP's announcement of a BRL1 billion ($192 million) share buyback program on the same day as the downgrade was a clear confidence play. The move reduced shares outstanding by 2.2%, signaling management's belief in undervaluation.

Bulls argue this is a classic Cramer-esque "buy the dip" strategy. The company's 19% capital ratio and 17.3% CET1 ratio suggest ample liquidity to fund buybacks without compromising stability. However, bears counter that this is a distraction tactic amid allegations of financial engineering.

Analyst Sentiment: A Split Decision

The analyst community is divided. While UBS upgraded XP to "Buy" (citing its undervalued status and strategic shifts), Morgan Stanley and Goldman Sachs grew cautious. The consensus price target of $22.21 reflects a middle ground: long-term potential is undeniable, but near-term risks—including the Grizzly report—can't be ignored.

The key question: Can XP's 20% YoY net income growth and dominance in Brazil's wealth management market outweigh short-term concerns?

The Elephant in the Room: The Ponzi Allegations

Grizzly Research's March 2025 report claims XP's profits rely on a "Madoff-like" scheme involving its Gladius and Coliseu funds. The funds' 2,419% five-year returns (with suspiciously low volatility) are allegedly fueled by COE derivatives sold to retail clients. Former employees reportedly warned that XP's survival hinges on perpetual inflows—a red flag if Brazil's economy sputters.

XP denies the claims, but the damage is done:
- The stock dropped 5.48% post-report to $14.14.
- Short interest rose to 3.53% of shares outstanding, with institutions like Jane Street and Vinland Capital betting against it.

Investors must ask: Is this a David vs. Goliath scandal (think Valeant) or a baseless attack? The SEC's whistleblower program offers clues—if insiders come forward, brace for a crash.

The Bottom Line: Buy, Hold, or Bail?

The Bulls' Case:
- XP's client assets hit BRL1.8 trillion, a 13% surge.
- Fixed income dominance (thanks to Brazil's high interest rates) and new credit card/insurance ventures offer growth.
- GuruFocus' $58 target implies 204% upside—a once-in-a-decade opportunity.

The Bears' Case:
- The Ponzi allegations are too detailed to dismiss.
- Analysts' "Market Perform" rating and stagnant retail inflows suggest saturation in Brazil's wealth market.
- A 57% YTD return before the downgrade may mean the stock is "due" for a correction.

My Advice:
This is a high-risk, high-reward call. If you're a long-term investor willing to weather volatility, dollar-cost average into dips below $20. But if you're risk-averse, wait until the Grizzly allegations are resolved. The stock's P/E of 10.26 is cheap, but only if the Ponzi claims are unfounded.

Final Take: XP's buybacks and growth stats make it a compelling play—but the Ponzi shadow looms large. Proceed with caution, and keep an eye on regulatory updates.

Stay tuned, and remember: In investing, sometimes the best move is to wait and watch.