One fintech that is bucking the bear market in tech stocks is Interactive Brokers (IBKR 0.86%). Despite the market downturn, the electronic trading platform continues to attract new customers. Since the bear market began last year, Interactive Brokers has gained 2%, while the Nasdaq Composite Index plummeted 25%.
Individual investors and professional trading firms flock to the company because of its cutting-edge platform and cost-effective trading fees. The company's recent earnings show no signs of slowing growth. Can Interactive Brokers maintain its unstoppable momentum? Let's uncover the secret to its success to find out.
Why investors are flocking to Interactive Brokers
Interactive Brokers provides electronic brokerage services to investors. It offers trading on everything imaginable, including stocks, options, futures, bonds, exchange-traded funds, and other financial products. You can think of it like Fidelity, Robinhood, or TD Ameritrade, except Interactive Brokers caters to tech-savvy investors.
Investors have turned to it for years because of its automated trading platform. Its senior management is made up mostly of software engineers and is committed to automating as much as possible. This automation enables Interactive Brokers to be the low-cost provider of choice.
Over five years, its customer count has grown by an impressive 332%, or 34% annually! Its customer accounts were up 25% in the fourth quarter from the year before to 2.09 million. Much of this growth was from individual investors, but it also saw an increase in proprietary traders and hedge funds. While this growth rate is solid, management thinks it can do even better.
How Interactive Brokers is staying ahead of the game
Interactive Brokers' secret to success is that it is always thinking about how to automate its platform and various processes, which has kept fees low to attract clients. However, its automation also improves customer experience, one reason it attracted so many hedge funds in the last couple of years.
Another benefit to is that its automated platform gives it fat profit margins. In 2022, its pretax profit margin was 71%, up from 62% the year prior. Companies with high profit margins are efficient at turning revenue into profit. As a result, it has juicy cash flows that it can use to reinvest in the business.
For example, while many tech companies are laying off employees, Interactive Brokers is adding staff to continue building out and automating its business for its customers. One project its employees are working on is building an auction model for options. This contrasts with the payment for order flow (PFOF) model, where brokers would sell client orders to a single market-maker who would execute the trades.
The SEC recently proposed changes requiring an auction-based execution on securities orders. Interactive Brokers is building up its platform to provide auctions on both securities and options, which could help its customers continue getting the best prices while also aligning with what regulators would like to see from all exchanges and brokers. While the SEC hasn't proposed changes requiring auctions on options, Interactive Brokers management hopes this will be yet another selling point to attract more customers to its platform.
Its automated business provides stability and growth
Interactive Brokers has done a stellar job of building out its automated platform, appealing to professional investors, and attracting individual investors too. Its impressive growth continued last year despite a tough time for the stock market, and it should continue to grab market share as it builds up its auction model for options trading.
It has impressive margins, an automated business, and plenty of capital to spend on expanding, with more than $100 billion in liquid assets and no debt on its balance sheet. Interactive Brokers' continuing investments in beefing up its tech-heavy business are a positive sign that its steady growth is likely to continue, making this fintech a solid stock to buy today.
