Investment Alert: Buy Interactive Brokers (IBKR) Under $75/share
Disclaimer: Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.
A combination of factors pose headwinds for Interactive Brokers. Increased competition from other online brokerages, volatile markets, and rising interest rates are just a handful of the reasons to steer clear of buying an online brokerage firm.
In spite of those concerns, we uncovered a potential diamond in the rough that has sold off recently and has huge upside potential.
- Interactive Brokers has a long history of revenue growth and high operating margin, which indicates that it is a highly efficient business.
- The online brokerage faces competition from peers, such as Robinhood and Charles Schwab, to lower commissions and expand product features.
- Fair value sits close to $110/share suggesting over 45% upside potential.
2 Million Reasons To Buy Interactive
It took 12 years for Interactive Brokers to grow from 100,000 to 700,000 accounts. That was the number of accounts before the pandemic accelerated growth rapidly. Since then the number has grown to 2 million.
Find more statistics at Statista
Even before the spike in accounts, the company had an impressive history of growing every year. We went back a full decade and didn’t find a single down year of revenue growth. Indeed, the low came in 2013 with revenues growing just 0.7% while the high came in 2021 with 23% growth followed by 15% growth in 2022.
For the last fiscal year, the company posted revenues of $3.1 billion. That’s an impressive figure but what really stands out is the company has almost $2 billion in operating income. To give you an idea of how that stands out as a percentage of revenues, Netflix generated $31.6 billion in revenues last year of which just $5.9 billion dropped on the P&L to operating income. To have almost two thirds of revenue fall to operating income is a sign of a highly efficient business.
The simple math says 2 million accounts produces about 2 billion in operating income, so each account on average contributes $1,000 to operating income.
Bear Case for Interactive Brokers
In spite of the impressive numbers, it’s not all sunshine and roses. Competition from Robinhood and Charles Schwab is stiff. The race to ever lower commissions is real and enticing customers through ever expanding features makes the brokerage business a race to the bottom in some respects: the product must constantly evolve while commissions are always under threat.
Volatile markets are an existential risk too because active trading is notoriously difficult to produce results for most people. As volatility rises, customer account sizes may dwindle, and that in turn hurts trading volume and commissions.
Is Interactive a Buy?
In spite of the threats, Interactive Brokers is very attractive at this time with significant upside potential. Our analysis suggests the upside potential is 45.4% to $110 per share. The consensus among analysts sits at $109 per share, while the range is from $97 to $141 per share.
The money on Interactive needs to be made on the share price rising. Yes, the company pays a dividend but it’s a modest 0.53% so not worth relying on to bring in much passive income.
The stock is currently trading at a P/E of 17x, has a market cap of $7.8B while generating $2B of operating income annually. It appears to be on sale and the recent selloff seems to be a compelling opportunity to buy well below fair value.