This analysis is shorter than my usual ones since I encountered some topics with the set up of the company which I personally don’t like. Therefore I kept this one brief and will shift my focus and time on deep dives of other companies.
Intro
I use multiple brokers to purchase my stocks, but have done almost all trading on a subbranch of Interactive Brokers in the last years. The platform and fees are a lot better than those of the competitors. This led me to investigate the company behind the product which I like. This is in general a great approach to identify potential investments: Check out the companies behind the products you love.
The Company
The company was founded by its chairman Thomas Peterffy in 1977 as a market maker and entered the electronic brokerage business in 1993. Interactive Brokers is an electronic, automated broker who serves both B2B customer such as ETFs and hedge and mutual funds as well as investment advisors and individual investors. More than 150 exchanges in 33 countries with 26 currencies are part of the offering. Interactive Brokers has 2800 employees. The customer have access to stocks, options, futures, forex, bonds, mutual funds, ETFs, precious metals and cryptocurrencies.
The focus has been from the beginning on technology and automation, making Interactive Brokers one of the lowest cost providers.
The Business
Interactive Brokers has a great track record. Client accounts increased with a CAGR of 34% since 2017 from 483k to 2.1m. Those clients are spread out across the world and are residing in more than 200 countries with 79% of all customers residing outside of the US. No single customer represented more than 1% of overall commissions.
The falling client equity in 2022 can be attributed to the market drop in 2022. The bright side of this increased volatility in global markets is higher trading volume from the customers which then leads to higher trading revenue. Cleared customer trades increased from 328m in 2018 to 735m in 2022. Interactive Brokers earned 2.83$ per cleared commissionable order in 2022.
Customers have access through different platforms such as a desktop trading platform, web-based platforms and a mobile app. On top of that, sophisticated customers can connect their own trading application through an API.
The main benefits for the customers are the very low transactions costs, a wide reach of available products (stocks, bonds, options, ETF and even crypto) and a very high interest rate on uninvested cash compared to all other brokers.
Interactive Brokers sees its own competitive advantage in its integrated trading system and communications network which leads to low trading costs for the clients and a fast and highly liquid pool of investments. The underlying software is developed internally and therefore IB is not depended on outside companies.
Interactive Brokers benefits from the higher interest rate environment and this boosts the interest IB earns on the cash at hand. Through the widening of the net interest margin from 1.17% in 2021 to 1.53% in 2022 Interactive Brokers increased the overall interest income by 45%. Customers get paid interest on their cash holdings above $10k. Amounts below are not considered and on these IB keeps the received interest which it gets from working with this money.
In the annual report of 2022, IB estimates, that a change of 0.25% in USD interest rate would increase (when interest rate rise) or decrease (when interest rate fall) the net interest income by $49m.
The increase in net revenue has been driven by a strong increase in net interest income, which almost doubled since 2020.
The Management
Founder and chairman of the board of directors Thomas Peterffy (78) and his affiliates owns though a holding company still 75.5% of all voting interest in Interactive brokers, while public shareholders hold the remaining 24.5%.
Risks
Competition comes from many different directions. These include banks, online-brokers and start-ups including other companies which offer electronic brokerage.
Since Mr. Peterffy holds the absolute majority of all vorting interest, he can influence the company strongly. Or as taken from the 10k: “Mr. Peterffy has the ability to elect all of the members of our board of directors and thereby to control our management and affairs, including determinations with respect to acquisitions, dispositions, material expansions or contractions of our business, entry into new lines of business, borrowings, issuances of common stock or other securities, and the declaration and payment of dividends on our common stock. In addition, Mr. Peterffy is able to determine the outcome of all matters requiring stockholder approval and will be able to cause or prevent a change of control of our company or a change in the composition of our board of directors and could preclude any unsolicited acquisition of our company.”
“The members of Holdings have the right to cause the redemption of their Holdings membership interests over time in connection with offerings of shares of our common stock. We intend to sell additional shares of common stock in public offerings in the future, which may include offerings of our common stock to finance future purchases of IBG LLC membership interests which, in turn, will finance corresponding redemptions of Holdings membership interests. These offerings and related transactions are anticipated to occur at least annually into the future. The size and occurrence of these offerings may be affected by market conditions. We may also issue additional shares of common stock or convertible debt securities to finance future acquisitions or business combinations. We currently have approximately 103 million outstanding shares of common stock. Assuming no anti-dilution adjustments based on combinations or divisions of our common stock, the offerings referred to above could result in the issuance by us of up to an additional approximately 317 million shares of common stock. It is possible, however, that such shares could be issued in one or a few large transactions.”
These share issuance is rooted in a tax saving setup constructed in 2007 at the IPO. There are overall 420m shares of common stock, of which currently there are only 103m listed. These further issuance will increase the liquidity of the outstanding shares.
The Fundamentals
Interactive Brokers has grown revenue and net income at rapid levels in the last years. The increasing interest rate environment is adding fuel to the fire and provides IB with another attractive source of income.
Valuation
With a P/E of 18 and a forward P/E of 14.4, IBKR is far below its historical average of 23.
Summary
I like the business and the underlying fundamentals. What I don’t like that much is the overall setup with the LLC holding in the background.
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If you like this post, check out my previous deep dives on
Adobe: https://41investments.substack.com/p/adobe-fundamental-deep-dive
American Express: https://41investments.substack.com/p/american-express-deep-dive
Evolution: https://41investments.substack.com/p/evolution-ab-deep-dive
Expedia: https://41investments.substack.com/p/expedia-deep-dive
InMode: https://41investments.substack.com/p/inmode-deep-dive
Markel: https://41investments.substack.com/p/markel-deep-dive
British American Tobacco: https://41investments.substack.com/p/british-american-tobacco
Amadeus FiRe: https://41investments.substack.com/p/amadeus-fire-deep-dive
Datagroup: https://41investments.substack.com/p/datagroup-deep-dive
Invest at your own risk, this is not financial advice! This is not a recommendation to buy or sell any securities discussed in the article.
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