Is Interactive Brokers on Sale?

Interactive Brokers (NASDAQ:IBKR) is one of several brokerages that have performed well over the last several years. With the explosion of interest in investing during and immediately after lockdowns, brokerages saw a huge uptick in users and revenues.

Now, there appears to be a possibility that Interactive Brokers is trading below its intrinsic value. Is IBKR stock a good investment?

Interactive Brokers Vs Competition

The investment thesis behind Interactive Brokers hinges on its tech-heavy investment model.

Due to heavy software automation, the company is able to offer low-cost trading and keep its commissions very low.

Interactive Brokers also differentiates itself from some of its competitors by offering a wide range of investment instruments, including:

• stocks,
• ETFs,
• mutual funds,
• futures,
• foreign exchange instruments and
• options.

The company caters to both retail and institutional investors, giving it a wide potential customer base.

Will IBKR Go Up?

Interactive Brokers has seen strong revenue growth over several years, with total annual revenues rising from less than $1.3 billion in 2013 to $3.5 billion in 2023.

There are, however, strong indications that the company could be entering a temporary period of slower revenue growth.

In the most recent quarterly report, Interactive Brokers reported just 2 percent growth in commission revenue in its Q1 filings. While this was offset by much higher interest income, lower stock trading volumes could present an obstacle going forward.

One of the core arguments in favor of Interactive Brokers is the enormous net income growth the company has been able to generate in recent years.

As recently as 2018, Interactive Brokers was producing under $100 million annually. The company’s trailing 12-month net income has risen to $455 million. In Q1, Interactive Brokers reported diluted earnings of $1.42 per share, up from $0.74 in 2022.

Interactive Brokers has been able to keep its margins high as its revenues have increased. The current pretax margin for the company is over 45 percent, though its net margin is substantially lower at 8.8 percent.

How Many Accounts Does Interactive Brokers Have?

User growth has been another major positive for Interactive Brokers. Compounded user growth has averaged 34 percent annually over the last five years.

As of Q1, the company reported 2.2 million total accounts, up 21 percent from the previous year. Assuming it can keep up this strong customer acquisition trend while maintaining its current margins, Interactive Brokers is in a good position to generate sustained earnings growth going forward.

With that said, earnings are expected to stall out this year and remain essentially flat over the coming 12 months. On the 3-5 year time horizon, however, Interactive Brokers is expected to generate compounded earnings growth of nearly 30 percent.

Such a high growth rate would likely push shares higher, though investors may have to hold their shares for quite some time in order to realize the full benefit.

Is Interactive Brokers Stock A Good Investment?

Due in part to the rapid growth Interactive Brokers has seen in recent years, analysts remain optimistic about the stock’s future.

The consensus target for IBKR is $102, an upside of 32.1 percent from the most recent price of $78. Five of the seven analysts covering Interactive Brokers also rate it as a buy, with the remaining two offering outperform ratings on the stock.

The upside potential of Interactive Brokers is supported by its seemingly low valuation. At just 6.3x revenue and 13.8x earnings, the stock is priced more like a mature company than one experiencing rapid growth.

While Interactive Brokers may see its earnings stagnate this year, the company’s long-term growth potential could still make it an attractive buy at current prices.

It’s also worth noting that Interactive Brokers has maintained a very strong balance sheet as it has expanded. The company holds no long-term debt, and its reserve of cash and equivalents is currently $3.2 billion. While this is a slight decrease from the $3.4 billion Interactive Brokers held in Q4, the company has more than enough cash to continue funding its operations while investing in growth initiatives.

A final factor for investors to consider about Interactive Brokers is its small dividend. The stock currently pays $0.40 per share annually, a yield of just 0.5 percent.

Dividend payments began in 2022, and the current payout ratio is under 10 percent. As such, management may choose to increase this dividend over time in order to return more cash to shareholders.

Does Robinhood Commission-Free Model Hurt IBKR?

The single largest risk factor for International Brokers is almost certainly competition. Despite the strong trend of user growth, the company has experienced recently, Interactive Brokers still boasts less than 10 percent of Robinhood’s total user numbers.

The rise of commission-free trading and the related draw of platforms like Robinhood may make it difficult for Interactive Brokers to compete as a commission-based brokerage.

The company could also encounter short-term difficulties as a result of waning interest in the stock market. Due to a combination of inflation, higher interest rates and slow economic growth, Americans are more pessimistic about the stock market than at any point in nearly two decades.

With less investment activity, brokerage platforms across the board could find it difficult to grow until macroeconomic conditions and investor sentiment improve.

Is Interactive Brokers on Sale?

While it may take some time for substantial returns to materialize, Interactive Brokers could be a decent buy for investors willing to buy and hold. With scintillinating margins, strong historical revenue growth and a proven business model, Interactive Brokers’ pros seem to outweigh the risks associated with it.

It is worth noting, however, that this bullish view hinges on renewed earnings growth after what is expected to be a stagnant year for the company.

If macroeconomic conditions continue to depress trading activity or the company fails to expand its user base, the stock’s upside potential could be lower than expected. In spite of this risk, Interactive Brokers seems to be trading at enough of a discount to its probable future value to make it a potential buy for moderately risk-tolerant investors.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.