Smartphones have enabled investing to reach the masses, driven by the viral growth of the Robinhood Markets trading application. It now has over 25 million customers and was only incorporated in 2013. Everyone knows about Robinhood, but another disruptive stock brokerage platform is gaining rapid share of the investment community, coming at the industry from a different angle: Interactive Brokers (IBKR 2.35%).
Known as IBKR for short, the company has grown its client equity at a rapid rate over the last decade as sophisticated investors flock to the platform. Its stock price has soared in response to these gains, leading management to split its stock on June 16. Does this make IBKR the perfect stock-split stock to add to your portfolio today? Here's why the gains for the advanced brokerage platform should continue in the years ahead.
Steady market share gains
Usage of Robinhood and other simplified trading applications soared during the pandemic's height before stalling in the bear market of 2022. At the end of 2021, Robinhood had 22.7 million customer accounts, only slightly below the number of accounts it has today, and that's with aggressive marketing spend and promotional programs.
Many of these customers were initially beginners, but have since turned into investors looking for a more advanced brokerage platform. This was a perfect situation for IBKR to take this small but highly valuable customer base away from Robinhood-type brokerages. Growth of active accounts on IBKR has been steady for the last decade, hitting 300,000 in 2015, 1.1 million in 2020, and 3.6 million as of its latest first-quarter update.
Why is IBKR gaining market share? It's offering individuals a wide breadth of assets to trade that were historically only reserved for professional investment funds. This includes easy international trading in over 100 markets, foreign currency trading, bonds, and options, all with affordable fees and commissions.
In recent years, it has tried to move both up and down market from its first core customers. It launches the IBKR Lite trading application with commission-free trades and IBKR's white glove services for large advisory firms and hedge funds. IBKR Lite is going for Robinhood customers who are just getting into investing, while the white glove service is for large professional funds that typically use legacy brokerages for trading.
With 3.6 million active accounts, IBKR is nowhere near the market leader in brokerage services. This is a good thing. Over the next decade, it can take its historical playbook and keep taking market share from competitors because of its breadth of services at affordable prices. For reference, Charles Schwab has 37 million active accounts, or more than 10x IBKR's number today. This is a huge opportunity for IBKR to steadily convince investors to switch to its platform, with its wider breadth of trading capabilities.
Image source: Getty Images.
Fantastic profit margins
IBKR's growth has been incredible. It had client equity -- which is the total net asset value of all its customers' portfolios -- of $32.9 billion in 2012. Today, that figure has grown to $573.5 billion, or an annual growth rate of 26.3%. This not only shows that IBKR is able to convince investors to switch to its platform, but that it's more valuable revenue-wise than the average trader. Using its total client equity and total active accounts, the average IBKR account has client equity of $159,000, which is much higher than Robinhood's average account level of under $10,000.
What makes this growth even more impressive is how efficiently the company operates from an expense and advertising basis. Last quarter, IBKR had a pre-tax profit margin of 74%, making it one of the most profitable businesses in the world by margin. It's able to do so because of its advanced technology capabilities that let it run automated brokerage functions, such as making margin calls on customers. It doesn't have to spend a boatload on marketing like Robinhood because of its superior product.
This efficiency and growth add up to $793 million in net income generated for IBKR over the last 12 months, up over 200% in the last three years.
IBKR Net Income (TTM) data by YCharts.
Is IBKR stock a buy?
Today, IBKR has a market cap of $22 billion. That measures the value of IBKR for its non-controlling interests that sit with the founder Thomas Peterffy and his family. It's this market value that you're buying as an outside investor.
While a stock split doesn't change anything about the fundamental analysis of IBKR, I believe now is as good a time as any to buy shares of this disruptive brokerage platform. The stock currently trades at a price-to-earnings ratio (P/E) of 28, which does look expensive at first glance. However, investors should remember that IBKR has impressive track records of earnings growth and of acquiring clients to the platform.
Today, IBKR's net income applied to common shareholders is $793 million. If that figure triples again over the next five years -- just as it has in the past three -- it will grow to around $2.4 billion, bringing the trailing P/E ratio to under 10. For those with a longer time horizon, IBKR stock looks like a wonderful buy at these prices. Buy shares, hold on tight, and wait patiently for wealth to build in your portfolio.
