This Stock's Explosive Earnings Growth Isn't Over

It's hard to compare 2021 to last year when it comes to stock market volatility. The pandemic-driven crash, which was followed by an explosive recovery, caught even the most seasoned investors by surprise. New, first-time traders flooded the markets in numbers that pushed trading volume to record highs, but many pundits predicted it would dissipate when the pandemic subsided.

Interactive Brokers (IBKR 1.39%) just delivered an earnings result that suggests the increased market participation has legs. The trading platform operator now has over 1.4 million client accounts, which is 61% more than the same time last year. With those customers holding over $363 billion in cash and assets, Interactive Brokers has a big opportunity ahead.

Image source: Getty Images.

Investors love stocks

Interactive Brokers provides a unique looking glass into financial-market activity. People don't normally leave cash in their trading accounts unless they intend to deploy it, so when you see the company's client account balances up 79% year over year, it's an indication that investors might be confident about the markets.

It showed up in the numbers, as trades made by its clients grew materially. 

Data source: Company filings.

When reviewing the segments, it's clear that stocks were the favored asset, with 154% growth in the number of shares traded. But volume in options contracts -- famously popular with the Robinhood Markets retail crowd last year -- was also up big.

Data source: Company filings.

Clients were borrowing money in big numbers to purchase stocks, with margin loans nearly doubling to $48.8 billion. It's yet another sign of investor confidence and an incredibly lucrative part of Interactive's business. These loans generated $274 million in net interest income, a 40% increase over Q2 2020 -- making up over a third of the company's total revenue.

Second-quarter financial highlights

Total customer assets have climbed steadily each and every month this year. Considering that trading volume drives the company's revenue, more client assets mean a much bigger fee base -- therefore, more commissions and potential earned interest. 

Almost half of Interactive's revenue comes from commissions, fees, and related services. Combined, they rose by 40% in the quarter. 

Data source: Company filings.

Analysts were estimating earnings per share of $0.82 in Q2, and the company topped that number by a solid 21%. More impressively, it represented triple-digit percentage year-over-year growth. 

Increased revenue wasn't the only driver of this big beat, as the company saw a 32% reduction in costs, led by the absence of a $97 million non-recurring expense associated with customer compensation for losses incurred last year. Expenses excluding that item were still down by about 2.2%.

If we remove the pandemic and instead compare Q2 2021 to Q2 2019, total expenses were up just 13%, while revenue has grown by over 82%. This highlights the sheer scale of the brokerage business and the company's high 72% pre-tax margins. 

What comes next for Interactive Brokers

Financial markets are notoriously unpredictable in the short term, though it's evident many new investors have disregarded that fact. More trading activity is great for this company, but it has proven its worth over the long term by growing its client base by almost 800% in the last decade alone. If higher participation in the markets is here to stay, then investors should consider owning this stock long into the future. 

Analysts predict Interactive Brokers will generate $3.29 in earnings per share for the full year 2021, representing growth of 32%, compared to 2020. But two quarters into the year, it has already delivered EPS of $2.17, leaving the door open to beat those estimates.

For investors wary of a stock market crash in the future, remember that this company would benefit from any spike in trading volume -- so it might also be a great hedge for your portfolio.