Discount broker Interactive Brokers reported its first-quarter earnings on Tuesday April 21, recording massive trading activity during what proved to be one of the most volatile months in U.S. stock market history.

However, while you may think all this activity would benefit Interactive Brokers, and all online brokers for that matter, huge stock market and interest rate declines offered a counteracting headwind. After the quarter ended, Interactive Brokers also disclosed a huge trading loss as oil futures went negative for the first time ever on Monday night. 

The news sent shares down 8.8% the next day. But is the sell-off an opportunity?

a hand works a tablet next to a computer screen showing a trading platform.

Image source: Getty Images.

Q1 results

In the quarter, Interactive Brokers saw a huge influx of customers. This was likely due to several factors, including the consolidation and related business disruption of competitors, as well as outages at some newer trading apps that went down in March as volumes spiked to unprecedented levels.

Interactive Brokers (NASDAQ:IBKR)

Q1 2020 Growth (YOY)

Total accounts

22%

Customer equity

9%

Total customer DARTs

71%

Commissions revenue

55.4%

Commission per cleared order

(9.1%)

Data source: Interactive Brokers. YOY = year over year.

The 22% customer growth was quite amazing, showing Interactive Brokers taking market share from others amid the industry and market chaos. In fact, on the conference call with analysts, management said that the number of net customer additions in Q1 was the same as the first three quarters of 2019, combined. Daily average revenue trades spiked 71%, resulting in a 55.4% increase in commissions revenue. 

One might think this would have caused Interactive Brokers' stock price to spike, but the opposite actually happened, with shares down nearly 9% the next day.

Two reasons for the decline

While Interactive Brokers posted incredible numbers in terms of the things it can control, such as customer growth, it also faces significant headwinds for the things it doesn't control, such as interest rates. And negative oil prices.

Late in the quarter, interest rates fell and customers de-risked by paying down their margin loans, causing Interactive Brokers' net interest margins to fall from 1.67% to 1.45%. Net interest income actually increased marginally in the quarter, from $255 million to $264 million, but given the movement of interest rates at the end of the quarter, there is a bit of a lag in results. Management now says the company would be "lucky" to earn $150 million per quarter in net interest income if interest rates stay where they are and margin loan balances remain low.

Net interest income revenue accounted for about half of all revenue last quarter, so this would definitely be a headwind. The $100 million decrease would amount to a 20% overall decline in revenue, even if trading volumes stay this high.

A big loss from negative oil

Another weight on Interactive Brokers' stock was an extraordinary loss reserve it took just before its earnings release. This happened after the end of the quarter, so it didn't affect first quarter numbers. The company took an $88 million reserve due to customers with long oil contracts that miraculously went to negative $37.63 for contracts expiring Tuesday. That led to certain customers losing more than the actual equity in their accounts, forcing Interactive Brokers to cover the remaining charge.

It's unclear from the company's press release if any of this reserve will be released or if Interactive Brokers is 100% liable for the loss. On the conference call, Chairman Thomas Peterffy said, "We were up most of the night trying to figure out what was going on, and we still do not have all of our facts completely in order. But I felt that we have to put out this notice." 

An $88 million charge would put yet another dent in Interactive Brokers' net income next quarter, as the company made only $290 million in net income in Q1. When factoring in $100 million in lower net interest income and the $88 million charge, it's possible net income could fall to under $100 million next quarter, or down by two-thirds from Q1, even if trading volumes stay high.

The sell-off could be an opportunity

Though there's a lot of noise around interest rates and loss reserves due to the current market chaos, investors shouldn't lose the long-term perspective. Interactive Brokers' amazing account growth indicates it's winning market share from competitors, as customers flock to its low-cost service and excellent features, while some competitors showed that they weren't dependable in times of market stress.

That's why investors may wish to pick up Interactive Brokers shares after its big decline, as long as they have a long-term perspective in mind. The near-term could continue to be rocky.