Shares of Interactive Brokers Group (NASDAQ:IBKR) fell 14.7% in 2019, according to data from S&P Global Market Intelligence . The discount broker suffered from a triple-whammy of headwinds during the year, making 2019 difficult even for this competitively advantaged business.
In the beginning of the year, founder and CEO Thomas Peterffy announced he would be stepping down. In addition, falling interest rates in 2019 harmed all discount brokers, most of whom make a majority of their revenue from margin lending and other interest rate-sensitive loans. Finally, competition heated up as Interactive Brokers' rivals all dropped their commission rates to zero, as disruption from free apps such as Robinhood set a new bar in the online brokerage industry.
In January, 75-year-old Peterffy stepped down as CEO and ceded the role to longtime lieutenant Milan Galik, whom Peterffy had groomed for the role for the previous four years. Peterffy will still act as chairman, however. In a statement, Peterffy said, "[A]s I grow older, I must recognize that Milan [Galik] will do a much better job running the company than I would. With him at the helm, the strength of out business and the quality of our platform that delivers our offering will continue to grow as Interactive Brokers becomes the largest broker in the world."
While the transition has been smooth, investors may have been cautious about the leadership change, as Peterffy had been leading the company since its founding 42 years ago. Peterffy also began selling off his stock in small, regular intervals, which may have added to the overhang.
Things didn't get any better when the Federal Reserve began cutting interest rates. In the third quarter, Interactive Brokers' interest income made up 73% of its revenue, so any time interest rates are falling, it's a headwind to Interactive Brokers' net interest margin, which it largely makes from margin loans.
Finally, toward the end of September and early October, rival Charles Schwab (NYSE:SCHW) announced that it was eliminating its commission, to match start-ups like Robinhood and Interactive Brokers' Lite option. That spurred all the other discount brokers to follow suit. While Interactive Brokers is still on par with the lowest-cost options, more heated competition could put a crimp on customer growth, so the market sold off Interactive Brokers with the rest of the sector.
One reason Interactive Brokers had such a tough year was that it wasn't particularly cheap to begin with, and even after its tough year, it still trades at about 20 times forward earnings.
Still, the company just stated that it had 15% year-over-year account growth in December, along with a 15% increase in margin balances. However, daily average revenue trades came in 19% lower than the prior year, as volatility was far less than the crazy December of 2018.
In general, Interactive Brokers' metrics tend to offset each other. Lower interest rates spur higher-margin loans, and vise versa. A surging stock market is good for client equity, but it's bad for trading volatility as more people buy and hold.
Still, as long as Interactive Brokers keeps adding clients and has the lowest margin rates, it should do reasonably well and garner moderate growth. I just wouldn't expect any huge surges until interest rates start going in the other direction.