XP Inc (XP, Financial) recently experienced a daily loss of 5.14%, contributing to a three-month decline of 11.76%. Despite these market movements, the company's Earnings Per Share (EPS) stands at $1.33. Investors are faced with the question: Is XP (XP) modestly undervalued? This article delves into the valuation analysis to uncover the true value of XP Inc (XP), encouraging readers to explore the detailed assessment that follows.
Company Introduction
XP Inc (XP, Financial) is a technology-driven financial services platform based in the Cayman Islands, predominantly serving the Brazilian market with low-fee financial products and services. The company's operations are streamlined into a single segment, focusing on monitoring operations, decision-making on fund allocation, and performance evaluation. XP Inc generates its revenue mainly through brokerage commissions. A critical comparison between XP's current stock price of $22.71 and its Fair Value (GF Value) of $28.56 suggests that the stock may be trading below its estimated fair value, warranting a closer look into the company's valuation.
Summarize GF Value
The GF Value is a proprietary metric that represents the intrinsic value of a stock, as calculated by GuruFocus. It is based on historical trading multiples, a GuruFocus adjustment factor for past returns and growth, and future business performance estimates. The GF Value Line indicates the stock's ideal fair trading value. When a stock's price significantly exceeds the GF Value Line, it may be considered overvalued, potentially leading to subpar future returns. Conversely, a price well below the GF Value Line could indicate an undervalued stock with prospects for higher future returns. Currently, the stock of XP Inc (XP, Financial) seems modestly undervalued, suggesting that its long-term return could surpass the company's business growth rate.
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Financial Strength
Investing in companies with robust financial strength is crucial to avoid permanent capital loss. The cash-to-debt ratio and interest coverage are key indicators of financial health. XP Inc's cash-to-debt ratio of 1.13 ranks lower than 61.72% of its peers in the Capital Markets industry. Consequently, GuruFocus rates XP's financial strength as a concerning 3 out of 10, indicating a weak balance sheet.
Profitability and Growth
Investing in profitable companies, especially those with a history of consistent profitability, is generally less risky. A high-profit margin typically suggests better performance potential. XP Inc has been profitable for 7 out of the past 10 years. With annual revenues of $1.20 billion and an Earnings Per Share (EPS) of $1.33, it has an operating margin of -57.03%, which is lower than 83.8% of companies in the Capital Markets industry. GuruFocus thus considers XP's profitability to be moderate.
Regarding growth, it is a crucial valuation factor, as it often correlates with long-term stock performance. XP's 3-year average annual revenue growth rate is 4.9%, which is below average compared to its industry. However, its 3-year average EBITDA growth rate of 18.1% is more promising, outpacing 59.62% of competitors in the Capital Markets sector.
ROIC vs. WACC
An effective way to assess a company's profitability is by comparing its Return on Invested Capital (ROIC) to its Weighted Average Cost of Capital (WACC). ROIC indicates how efficiently a company generates cash flow relative to its capital investment, while WACC represents the average rate a company pays to finance its assets. Ideally, ROIC should exceed WACC. XP's ROIC is currently -1.77, which is less than its WACC of 7.75, indicating inefficiency in generating sufficient returns on invested capital.
Conclusion
In conclusion, XP Inc (XP, Financial) appears to be modestly undervalued based on GuruFocus's valuation methods. The company's financial position is weak, and its profitability is fair, but its growth is competitive within the Capital Markets industry. To gain a deeper understanding of XP stock, investors are encouraged to review its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
