When the stock market makes a relatively large move, it's a sign that trading activity might be elevated. Last year was definitely one of those times, with the benchmark S&P 500 falling 19% and the Nasdaq-100 technology index plunging 33%. That's generally positive for stock brokerages, who earn a commission whenever their customers place a trade.
Interactive Brokers (IBKR -1.01%) is one of the largest online investment platforms in the world. While heightened financial market activity is good for its business, the real difference maker in 2022 was higher interest rates. It's one of very few companies that benefited as the cost of money soared.
The tailwinds driving its business are likely to continue, at least in the near term, yet investors can buy Interactive Brokers stock right now at a very attractive price. Here's why they might want to grab that opportunity with both hands.
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Stock market volatility is a tailwind for brokers
Interactive Brokers' commission revenue was down 2% in 2022, coming in at $1.32 billion. But that was against an extremely strong comparable number in 2021, which, if you recall, was one of the most active years in stock market history. It featured a surge in participation from retail investors who sent some stocks to heights that certainly weren't reflective of their fundamentals.
As a result, stock trading volume was down 57% in 2022 compared to the unusually high 2021 figure. But that was partially offset by futures trading volume, which soared 34%, as well as options volume, which inched higher by 2%, building on an incredibly strong 2021 result.
One area in which Interactive continued to show undisputed strength was customer acquisition. It ended 2022 with 2.09 million client accounts, an increase of 25% year over year, which is evidence people are still very interested in investing.
Unfortunately, because the broader markets declined over the last 18 months, the total value of customers' cash and assets held at Interactive fell 18% year over year to $306.7 billion. The company typically earns commissions based on the dollar volume of its customers' orders, so when stock prices are down, it inherently makes less money in this part of its business.
Higher rates boost Interactive Brokers' financial results
To fend off high inflation, the U.S. Federal Reserve embarked on the most aggressive campaign to hike interest rates in its history. While that's hurting most companies through weaker consumer spending and an elevated cost of capital, Interactive Brokers has been a huge beneficiary.
There are two sides to that equation. First, Interactive earns interest on the cash its customers are holding in its custody. Second, it earns interest by loaning money to customers to buy stocks and other financial instruments.
The second avenue provides the majority of its interest income. At the end of 2022, the company had a net interest margin (NIM) of 1.53%, compared to 1.17% at the end of 2021. The NIM is the difference between what Interactive pays to borrow money and what it charges customers when it loans them money.
The end result was interest income of $2.68 billion in 2022, almost double the amount generated in 2021. Since the company's commission income dipped slightly as mentioned above, higher interest rates were solely responsible for pulling Interactive's overall revenue into growth territory.
That also helped lift the company to a 15% increase in its earnings per share for the year.
Interactive Brokers stock appears cheap right now
Based on the company's $3.75 in earnings per share in 2022 and its current share price of $76.99, Interactive Brokers stock trades at a price-to-earnings (P/E) ratio of about 20.6. Over the last 12 months, its P/E has hovered between 19 and 27, so it's near the low end of its range right now.
Additionally, the stock is 20% cheaper than the Nasdaq-100, which trades at a P/E of 25.6. Investors essentially have an opportunity to buy this high-quality company that continues to generate steady growth -- all at a cheaper valuation than the broader market.
The Nasdaq-100 index remains 23% below its all-time high, so stock market volatility will likely continue. Interest rates are also expected to remain elevated for the foreseeable future, and both of those factors point to continued financial growth for Interactive Brokers.
