Monty Rakusen Interactive Brokers (NASDAQ:IBKR) continues to benefit from a major secular trend: a growing cohort of investors in the 35 to 44 age range. According to research put together by Bank of America, there has historically been a correlation between overall trading volume and the number of middle-aged individuals. Moreover, we have seen a significant uptick in speculative trading in recent years, including a jump in volume in zero days to expiration options (0DTEs). These are powerful forces, but nearly all investors are aware that fees and commissions have come down in a big way in recent years. Still, brokerage firms able to gather assets and generate revenue for customers’ trading activity could be positioned well as the value of stocks and other asset classes rise. I have a buy rating on IBKR. The online brokerage services company has access to 135 markets and 23 countries. It offers custody services and brokerage services for hedge funds and mutual funds too. With solid organic growth prospects among retail investors, RIAs, and proprietary trading firms, the firm sports high operating margins and industry-leading technology capabilities. A Growing Population of Investors and Traders BofA Global Research Back in April, IBKR reported a solid set of quarterly results. Q1 non-GAAP EPS of $1.64 which topped Wall Street expectations by a penny. Revenue of $1.2 billion, up 13.2% from year-ago levels, was in line with estimates. Commission revenue jumped 6% to $379 million while customer trading volume was mixed versus the levels seen in Q1 2023. But options contract volume surged 24% and futures volume was also up markedly. IBKR continues to sport high margins – its pretax profit margin was 72%, up one percentage point on an adjusted basis YoY. The company is also in growth mode in terms of new accounts – there was a 25% increase in new customer accounts with a 36% rise in customer equity. Shares traded higher by 1.7% the following session. With strong business momentum, IBKR was clearly a beneficiary of rising stock prices and increased retail engagement. So, there were macro factors driving the firm to hit record profits to begin 2024. What’s interesting from an investment point of view is that IBKR now has $6 billion of its $15 billion in equity capital as dry powder for potential acquisitions. I hope the management team is prudent with this capital, though, as it has already been active in dealmaking, including key investments into both its retail and institutional brokerage platforms, which have apparently paid off well. Just last week, IBKR reported a 5% month-over-month jump in daily average trading revenue, resulting in a 26% YoY advance. As for the earnings report next week, the options market has priced in a low 3.6% earnings-related stock price swing when analyzing the at-the-money straddle expiring soonest after the Q2 report. Analysts expect $1.65 of non-GAAP EPS on $1.22 billion of revenue. I will be watching for trends in both its retail services and how much IBKR continues to penetrate the financial advisor landscape. Key risks include heightened competition as technological gains could turn more shared across the industry. Also, higher interest rates or rising unemployment could damper trading activity. Regulatory concerns are also top of mind – payment for order flow is a hot topic today, and adverse changes could hurt margins and earnings for IBKR. On earnings, analysts at BofA see operating EPS rising more than 20% this year before earnings growth slows in the out year. By 2026, though, the firm could near $9 in non-GAAP EPS. The current Seeking Alpha consensus forecast calls for a 15% per-share profit advance this year but then slower EPS trends in 2025 and 2026. IBKR’s top line is seen up 12% this year and then slowing to +2.5% and +7.5% in 2026. Dividends, meanwhile, are expected to hold at just $0.39 per year. Now with an upper-teen P/Es and positive free cash flow, the valuation and profitability cases are solid amid a generally favorable macro backdrop. Interactive Brokers Group: Earnings, Valuation, Dividend Forecasts BofA Global Research IBKR has historically traded with a P/E from the upper teens to the upper 20s. Peak profits are seen in the quarters ahead, so a lower earnings multiple is warranted. If we assume $7.50 of non-GAAP EPS and apply a 19x multiple, then shares should trade near $143, making the stock about $20 to the cheap side today. A below-market P/E could be underselling the company, too, considering its very high margins and impressive growth rate today. A risk is the stock’s somewhat lofty price-to-sales ratio currently. IBKR: A Below-Market Earnings Multiple, Somewhat High P/S Seeking Alpha Compared to its peers, IBKR features a weak growth rating, but we do tend to see that across the industry. The $52 billion market cap company’s growth trajectory is just about the best you will find among its competitors and profitability trends are quite healthy. With likewise solid share-price momentum, there have been eight sellside EPS upgrades in the past 90 days compared with just a single earnings downgrade. Competitor Analysis Seeking Alpha Looking ahead, corporate event data provided by Wall Street Horizon shows a confirmed Q2 2024 earnings date of Tuesday, July 16 AMC with a conference call immediately after the numbers hit the tape. You can listen live here. The next month’s business update of interim data comes on Thursday, August 1 for July service figures. Corporate Event Risk Calendar Wall Street Horizon The Technical Take With shares undervalued amid a growth period fundamentally, IBRK’s technical chart is encouraging. Notice in the graph below that the stock is up big compared with year-ago levels. I see support in the $117 to $118 range – that was a peak from back in April as well as an area of support on a pullback just a few weeks ago. With a rising long-term 200-day moving average and a 50dma that is above the 200dma, the bulls clearly control the primary trend. A risk is bearish RSI momentum divergence that revealed itself over the first half of 2024. The stock advanced while the pace of gains eased. That negative divergence is made more important since shares notched a double top at $129 to begin the second half. I would like to see IBKR rally through $129 and certainly hold key support just below the $120 mark. Overall, the trend is positive and there are minor near-term cautious signals. IBKR: Bullish Uptrend, Monitoring $129 Double Top Stockcharts.com The Bottom Line I have a buy rating on IBKR. I see this growth stock as benefiting from secular and macro trends while its industry-leading technology provides at least an intermediate-term moat. Technically, the stock is in a strong uptrend.
sekar nallalu CFA,CMT,Cryptocurrency,IBKR,Mike Zaccardi Interactive Brokers Stock: Big Margins In Focus Ahead Of Earnings (NASDAQ:IBKR)