XP Inc's Record Net Income and Strategic Ecosystem Expansion: A High-Conviction Buy in a Defensive Growth Play

In Q2 2025, XP Inc. (NASDAQ: XP) delivered a stunning financial performance, reporting a record net income of R$1.3 billion—a 18% year-over-year (YoY) increase and 7% quarter-over-quarter (QoQ) growth. This achievement, despite macroeconomic headwinds in Brazil and a challenging global environment, underscores the company's operational resilience and strategic agility. With a net margin of 29.7% and a return on equity (ROE) of 24.4%, XP has proven its ability to convert scale into profitability while maintaining a disciplined cost structure. For investors, this raises a critical question: Can XP's ecosystem-driven diversification and capital-efficient model sustain long-term shareholder value, even in volatile markets?

Profitability and Capital Efficiency: A Foundation for Resilience

XP's Q2 results highlight its exceptional capital efficiency. The company's return on tangible equity (ROTE) reached 30.1%, a 283-basis-point YoY improvement, while its efficiency ratio dropped to 34.5% (LTM), reflecting a 161-basis-point decline from the prior year. These metrics outperform global peers and demonstrate XP's ability to leverage its asset base effectively.

The company's net margin expansion—320 basis points YoY—was driven by disciplined cost management and a shift toward higher-margin fee-based models. Despite a 10% YoY increase in SG&A expenses (primarily for technology and marketing), operating leverage allowed XP to maintain profitability. Its CET1 capital buffer of 18.5%, well above the Brazilian sector average of 12%, provides a safety net for future growth and regulatory compliance.

Diversification into Fee-Based Models: A Strategic Differentiator

XP's transition to a fee-based model is a cornerstone of its long-term strategy. Currently, 5% of total client assets are under fee-based arrangements, with management targeting 7%-8% over the next few years. This shift aligns with global trends, particularly in the U.S., where fee-based models dominate 50% of client assets. While fee-based models may lower short-term take rates, they enhance client lifetime value and wallet share, creating a flywheel effect.

The company's flexibility in offering both transactional and fee-based services allows it to cater to diverse client preferences. For example, its Registered Investment Adviser (RIA) model now accounts for over half of new asset inflows, reducing reliance on traditional Independent Financial Adviser (IFA) channels. This diversification has driven total client assets to BRL1.9 trillion, with high-net-worth (HNWI) client inflows up 43% YoY.

Cross-Sell Verticals: Fueling Revenue Diversification

XP's ecosystem expansion into cross-sell verticals is a key driver of sustainable growth. In Q2 2025, new product offerings—including credit cards, life insurance, retirement plans, and consortium services—generated $256 million in revenue, a 146% YoY increase.

• Credit Cards: Total Payment Volume (TPV) grew 8% YoY, with new affluent and private banking products poised to accelerate growth.
• Life Insurance: Written premiums surged 45% YoY, reflecting the vertical's early-stage potential.
• Retirement Plans: Client assets reached BRL86 billion, up 15% YoY, with XP expanding its sales force to capture a larger market share.
• Consortiums: A zero-base product now gaining traction, signaling strong future scalability.

These verticals not only diversify revenue but also deepen client relationships. For instance, fixed-income trading revenue grew 20% YoY, while insurance premiums rose 45%, creating a buffer against market volatility.

Capital Allocation and Shareholder Returns: A Win-Win Strategy

XP's capital allocation strategy is equally compelling. In H1 2025, the company executed BRL915 million in share repurchases under its BRL1 billion buyback program, reducing the share base and boosting diluted EPS by 22% YoY. With a 74% payout ratio and a commitment to return over 50% of net income to shareholders via dividends and buybacks in 2025-2026, XP prioritizes value creation.

The stock's recent volatility—triggered by a legal dispute with Grizzly Research—was short-lived. After a 5.5% dip, shares rebounded to $19.48 as of July 2025, supported by a Zacks Rank #1 (Strong Buy) and a 17.14% upward revision in earnings estimates.

Navigating Macro Challenges: A Defensive Growth Play

While Brazil's economic uncertainty and global market jitters pose risks, XP's diversified ecosystem and strong balance sheet act as a buffer. The company's focus on high-net-worth clients, who are less sensitive to market cycles, further insulates it from downturns. Additionally, its expansion into non-investment income streams—such as insurance and retirement plans—reduces reliance on asset management, a sector prone to volatility.

Investment Thesis: High-Conviction Buy

XP Inc. is a rare blend of defensive resilience and growth potential. Its record net income, capital-efficient operations, and strategic diversification into fee-based models and cross-sell verticals position it as a long-term winner in Brazil's competitive financial landscape. For investors seeking a high-conviction play, XP offers:
- Margin resilience through disciplined cost management and fee-based model adoption.
- Revenue diversification via cross-sell verticals that deepen client relationships.
- Shareholder-friendly policies with a robust buyback program and strong capital buffers.

Despite near-term macro challenges, XP's ecosystem-driven strategy and operational agility make it a compelling buy for those with a multi-year horizon. As the company continues to expand its fee-based model and scale cross-sell verticals, its long-term value creation potential remains robust.