• If you are wondering whether XP at around US$15.60 is starting to look like a bargain or still carries too much risk, the recent share performance gives you some important clues.
• The stock has fallen about 9% over the past week, around 15.7% over the past month, and is down 19.5% over the past year. This may change how investors think about both its potential and its risks.
• Recent coverage of XP has focused on how the stock has pulled back over different timeframes and what that says about investors reassessing expectations, as well as how the broader Capital Markets sector has traded in the same period. Together, these stories help frame whether the current share price is simply reflecting sentiment or something more fundamental.
• Against that backdrop, XP currently holds a valuation score of 6 out of 6. Next up is a look at how different valuation approaches stack up for this stock and how an even richer way of thinking about value can change the picture by the end of the article.

Approach 1: XP Excess Returns Analysis

The Excess Returns model looks at how much profit a company can earn above its cost of equity and then links that to the value of its equity base per share.

For XP, the model uses a Book Value of $47.84 per share and a Stable EPS of $13.45 per share, based on weighted future Return on Equity estimates from 11 analysts. The implied Average Return on Equity is 23.38%, while the Cost of Equity is $7.17 per share. That leaves an Excess Return of $6.28 per share, which is what XP is estimated to earn above the return investors are assumed to require.

The Stable Book Value is put at $57.53 per share, sourced from weighted future Book Value estimates from 5 analysts. Combining this equity base with the forecast excess returns produces an intrinsic value estimate of about $25.24 per share. Against the recent share price around $15.60, the Excess Returns model points to the stock trading at roughly a 38.2% discount, which is a wide gap.

Result: UNDERVALUED

Our Excess Returns analysis suggests XP is undervalued by 38.2%. Track this in your watchlist or portfolio, or discover 47 more high quality undervalued stocks.

Approach 2: XP Price vs Earnings

For profitable companies like XP, the P/E ratio is a useful way to see how much you are paying for each dollar of earnings. It links the share price directly to the company’s current profit, which is usually the main driver of long term value.

What counts as a “normal” or “fair” P/E depends on how quickly earnings are expected to change and how risky those earnings are. Higher growth potential or lower perceived risk often leads investors to accept a higher P/E, while slower growth or higher risk usually supports a lower P/E.

XP currently trades on a P/E of about 7.75x. That sits well below the Capital Markets industry average P/E of about 39.26x and below the peer group average of roughly 14.98x. Simply Wall St’s Fair Ratio for XP is 16.38x, which is its proprietary estimate of what the P/E “should” be after factoring in the company’s earnings profile, industry, profit margins, market value and key risks.

The Fair Ratio can be more informative than simple peer or industry comparisons because it adjusts for differences in growth, risk and size, rather than assuming all companies deserve similar multiples. When XP’s current P/E of 7.75x is compared with the Fair Ratio of 16.38x, the shares appear to be trading below this implied fair level.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your XP Narrative

Earlier it was mentioned that there is an even better way to think about valuation. Meet Narratives, a simple tool on Simply Wall St’s Community page that lets you link your story about XP to a financial forecast and a Fair Value, then compare that to today’s price to help decide whether the stock looks attractive or expensive on your terms.

Do you think there's more to the story for XP? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.