A stock split does not change anything about the underlying business fundamentals of a stock, and yet, stock-split stocks tend to outperform over the 12 months following a split. This makes them interesting to pay attention to. One under-the-radar stock split that occurred this month is Interactive Brokers (IBKR 1.65%), performing a 4-to-1 split on its common shares.
The technology-focused investing brokerage has grown users, revenue, and earnings at an impressive rate in the last 10 years, with customers drawn to its advanced trading platform. Does this make the stock a perfect buy for investors right now? Let's take a closer look at why Interactive Brokers is a winning stock to add to your portfolio.
Comprehensive offering for the masses
Interactive Brokers is an advanced trading platform that brings professional service to the masses. By enabling its customers to trade virtually any foreign market, currency, bonds, futures, and more, the brokerage has built up a better value proposition than traditional brokerages, even online-focused ones. It has an easy-to-use mobile application as well as more advanced trading tools, helping it cater to the more sophisticated individual investor as well as professional investors and hedge funds. It does all this at a reasonable price, including free stock trading on its IBKR Lite platform.
This consistent focus on a wide swath of trading capabilities at a reasonable price has helped Interactive Brokers convince investors to switch to its brokerage platform. Back in 2012, Interactive Brokers only had 200,000 active customers, a minnow in the brokerage world. Today, it has 3.6 million customers that skew toward wealthier, advanced, and professional traders. This is a valuable set of customers with high lifetime values.
To keep furthering its brokerage offering, Interactive Brokers is now offering more cryptocurrency trading and the fast-growing prediction marketplace, which allows users to bet on things such as the outcome of a country's election. The more types of trades you can make on Interactive Brokers, the more valuable it is for customers. This is why investors are switching from legacy players to Interactive Brokers.
Image source: Getty Images.
An impressive run of earnings growth
Typically, fast-growing companies are not very profitable because of how much they need to spend on advertising, marketing, and technological development. Not Interactive Brokers. The company has built up a culture of efficiency and product-led growth combined with a highly automated brokerage platform that needs fewer employees to manage.
Last quarter, Interactive Brokers had a pre-tax profit margin of 74%, which is one of the best profit margins of any company globally. The average profit margin for the S&P 500 index has ranged from 10% to 15%. Interactive Brokers has used this increasing operating leverage to put up impressive earnings growth in the last few years. Net income is up 400% in the last five years, hitting $793 million over the last 12 months. With only a small portion of investors using Interactive Brokers, the company has plenty of room to keep growing in the years to come; it is nowhere near one of the largest players in the brokerage market today.
IBKR PE Ratio data by YCharts
Should you buy IBKR stock?
Investors who are backward-looking may think they have missed out on owning Interactive Brokers stock. It is up 67% in the last 12 months and just went through a stock split. I believe these investors are missing the forest for the trees.
At today's stock price, Interactive Brokers trades at a price-to-earnings ratio (P/E) of 28. Most value investors would look at this high earnings ratio and scoff at investing in this company. However, we need to remember that Interactive Brokers has put up impressive levels of user, revenue, and earnings growth in the last five years and still has a long runway to keep stealing market share of brokerage customers. Its superior platform is not going to be replicated overnight, and it keeps improving its breadth of products and services every year.
If Interactive Brokers can keep growing its earnings at a fast clip (which I think it can), the stock is a great buy after its recent stock split.
