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Is Interactive Brokers a Good Growth Stock to Buy?

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The company recently reported another solid earnings quarter.

If you're interested in investing in online stockbrokers, you've likely come across the name Interactive Brokers (IBKR 1.66%). The company has been in business for well over four decades, but with players like Robinhood gathering much of the headline hype, you might be wondering whether this established name is a solid choice for long-term investors. In this segment of Backstage Pass, recorded on Oct. 19, Fool contributors Brian Withers and Billy Duberstein discuss. 

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Brian Withers: Billy, I know of other Motley Fool members who use Interactive Brokers for options trades. It's a favorite amongst the Fool. I don't know if they talk about the makeup of their customers. What kind of makeup are those? Do they talk about that at all?

Billy Duberstein: I haven't looked. They typically, in the earnings-call transcript, which is going on now -- they'll talk about what portion of their equity is individuals? What are investment advisors? How many are hedge funds?

Withers: That's a good point. This isn't just a consumer-facing platform. These are some big companies with lots of assets that are using Interactive Brokers.

Duberstein: It's everything from individual investors to hedge funds. Again, this is a company that was founded by a Hungarian immigrant, Thomas Peterffy. I think he's in his 80s. He still owns something like 78% of the company. [laughs] Something ridiculous like that. He was a computer programmer by trade. I think he started  Interactive Brokers as a market-maker for options.

Then when the discount brokerage world took off, he took his technology chops and he put it into the brokerage business. From what I found, these guys have the lowest commissions in the market that I've seen.

Because they rely so much on technology, it's not quite as user-friendly as some of the other brokerages out there. Need a little bit of patience maybe to do some more stuff yourself for your clients. If your investment advisor have to do, takes a little bit of hand-holding. They have to do some more things themselves than they normally would. But in return, you get really rock-bottom commission rates and margin low rates.

Obviously with Robinhood now coming into the market, really taking price score to zero, these guys have adapted, but as you can see with 57% customer account growth, it might be a little bit of a different segment. Doesn't really seem to be affecting their results too much.

Withers: Yeah, that was what I was going to ask you next is certainly the consumer-facing folks who want to get into options and what an easy app to get into that. I think Interactive Brokers is happy to let those [laughs] customers go to Robinhood.

Duberstein: [laughs] Yeah. This is a low-cost brokerage, but they do have a lot of capabilities. They have a lot of charting, they have a lot of sophisticated tools you can use. It's not just for the layperson, even though it has very low base. It's a nice combination. On the other hand, if you only have a couple of thousand and you're looking to day trade, I think they're happy, you go over to Robinhood.

Withers: Well, thanks so much for doing as much deep dive as you did with very little time. Is there anything you want to close with before we move onto the next stock?

Duberstein: Not particularly. Again, the conference call's going on now. This is a closely held company with the CEO and founder who's in his 80s. On the other hand, it's been a good compounder for its life as a stock.

It hasn't done very well over the last three years from competitive pressures, but they just keep attracting more and more customers. One thing I would want to point out is these guys are about 1/20 the size of Schwab still, in terms of customer equity and customer accounts. Even though they've been around a long time, they're still pretty small. I think there's a lot of space to grow even amid all of this new competition.

Withers: You mentioned the three-year stock return. If you actually go back five years, they've more than doubled. That's a nice 15% plus return over the longer period of time.

Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Rachel Warren has no position in any of the stocks mentioned. The Motley Fool recommends Charles Schwab and Interactive Brokers and recommends the following options: short December 2021 $70 puts on Interactive Brokers. The Motley Fool has a disclosure policy.

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