The COVID-19 pandemic created a wave of financial market volatility, with investors racing to adjust their portfolios amid the most uncertain economic environment in recent memory. With extensive societal restrictions and lockdowns in place, many people were confined to their homes with little to do but wait -- and invest their stimulus dollars in high-flying growth stocks. For many of them, it was their first foray into the markets.
Interactive Brokers (IBKR 3.23%) was one of the trading platforms trying to manage the influx of new investors. The U.S. is now removed from the worst of the pandemic, and it could be expected that stock market activity will cool off -- but so far, 2021 has delivered record numbers and strong growth for Interactive Brokers' earnings.
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First-quarter results
The company operates as a client-focused broker, offering trading services to retail and institutional investors alike in markets that include global stocks, bonds, futures, and options. It services over 1.3 million client accounts across more than 180 countries around the world. After a strong 2020, Interactive Brokers continued to grow its most important metrics in the first quarter of 2021.
The company delivered Q1 revenue of $893 million, up 67% year over year, led by non-interest income (commissions and service fees). A higher percentage of revenue flowed through to the bottom line, on account of increased profit margin, with $1.16 in earnings per share versus $0.60 in Q1 2020. Broking is a scalable business, meaning the company can get additional output for each unit of input. For example, Interactive kept expense growth to just 13.4% year over year -- compare that to revenue growth and that's where the boosts in margin come from.
Trading volume remains significantly elevated.
|
Metric |
2018 |
2019 |
2020 |
Q1 2021 |
|---|---|---|---|---|
|
Trading volume (millions of trades) |
368.6 |
345.7 |
704.2 |
273.9 |
Data source: Interactive Brokers.
While some market commentators dismiss the retail trader boom of 2020 as a short-term phenomenon, it's likely that at least a portion of these traders will adapt to become longer-term investors. Trading costs are at record lows, including at Interactive Brokers, with Q1 commissions-per-cleared trade at $2.31 -- down 30% year over year. Combined with smartphone apps making access to the markets easier than ever, it might be hard to put the genie back in the bottle on the retail investor wave.
Signs of slowing momentum
For the full year 2020, Interactive Brokers added an average of 31,940 new client accounts per month -- more than four times as many as the 7,640 a month it added in 2019. The momentum has carried through to 2021, with the company adding 71,575 accounts a month on average so far, including over 116,000 in January alone. There is some evidence that the growth rate is reversing, though.
|
Metric |
January |
February |
March |
April |
|---|---|---|---|---|
|
2021 New accounts |
116,100 |
75,800 |
60,200 |
34,200 |
Data source: Interactive Brokers.
With early data by Piper Sandler showing a more than 30% boost to average daily volume in January -- compared to 2020 -- it's evident that investors have continued trading at record levels. The slowdown in momentum is apparent at Interactive Brokers, however, and entering the summer season with life inching toward normalcy, client investment portfolios might be taking a back seat to other priorities.
Total share volume through Interactive is also down markedly. After 130 billion shares traded in February -- the high for 2021 -- investors exchanged just 57 billion shares in April, a 56% decline.
Going forward
Excluding any major economic shock or resurgence in the pandemic, the summer should bring a broad slowdown in market volume. This could impact Interactive Brokers' bottom line, but it's important to remember the company has 93% more client accounts now than it did in January 2020.
The company has delivered $2.95 per share in trailing-12-month earnings, so at Thursday morning's prices, the stock is trading at a multiple of 22.5 times. Its current price sits at levels not seen since 2018 -- but it's cheaper now than it was back then, when the multiple was over 30 times.
According to Yahoo! Finance, the full-year 2021 consensus earnings estimate for Interactive Brokers is $3.20 per share, which would bring the multiple down to about 21 times, assuming the share price remains the same. While this isn't cheap, it might not be expensive either when factoring in the significant account, revenue, and trade volume growth in the business. Investors should watch the next two quarters as the summer sets in, to see if this new cohort of investors continues to remain active.
