When a company creates a significant amount of value over the long term, its stock price can soar into the hundreds or even thousands of dollars, which makes it difficult for the average retail investor to buy whole shares. But a stock split solves that by increasing the number of shares in circulation, which organically reduces the price per share by a proportionate amount. It doesn't change the underlying value of the company, it just makes the stock more accessible to smaller investors.
Interactive Brokers (IBKR +0.97%) operates one of the world's largest online investing platforms for stocks, options, futures, and cryptocurrencies. Its stock has gained more than 700% since going public in 2007, and it was recently trading for more than $200. The company executed a 4-for-1 stock split in June, which increased its share count fourfold and reduced its price per share to just $50 at the time.
Interactive is likely to continue creating value for investors over the long term, so here's why its stock might be a great buy right now.
Image source: Getty Images.
Interactive is experiencing an influx of new clients
Interactive Brokers recently reported its operating results for the second quarter. The company had a record 3.87 million customers at the end of the period, which was a whopping 32% increase from the same time last year. Stock market volatility tends to attract new investors, and the second quarter had that in spades.
On April 2, President Donald Trump announced a series of tariffs on America's trading partners, which contributed to a 19% plunge in the S&P 500 (^GSPC +0.32%) index as investors braced for a global economic slowdown. But by June 30, the president had paused the most aggressive aspects of his new trade policy, which led to a full recovery in the S&P -- and even a new high.
The elevated volatility drove a staggering 49% year-over-year increase in Interactive's DARTs (daily active revenue trades) metric during Q2, which means clients were feverishly adjusting their portfolios amid the chaos.
Customer equity also surged 34% to a new quarterly high of $664.6 billion by the end of the quarter. This represents the collective value of all the stocks, securities, and cash customers are holding on Interactive's platform. The new all-time high in the S&P 500 (and other market indexes) boosted the customer equity figure, but the influx of new clients was also a tailwind.
Interactive earns commissions based on the value of every stock, cryptocurrency, options, and futures transaction executed by its clients, so a higher customer equity figure can directly translate into more revenue for the company.
Interactive's commission revenue is growing rapidly
Interactive Brokers generated $1.48 billion in total revenue during the second quarter, which was a 20% increase from the year-ago period. The company's revenue has two main components:
- Commission revenue, which Interactive earns by processing transactions for its clients. This came in at $516 million during the quarter, which was up 27% year over year.
- Net interest revenue, which is the interest Interactive earns on its own cash reserves, the cash it's holding for its clients, and on margin loans. This came in at $860 million during the quarter, up 9%.
There is a third, much smaller component made up of other service fees and income, which came in at $104 million.
Interactive's strong commission revenue growth reflects the surge in both trading volume and customer equity in the second quarter. Net interest revenue grew at a more modest pace because interest rates are currently lower than they were a year ago, after the Federal Reserve's three rate cuts near the end of 2024.
Analyst expect the Fed to continue cutting rates in 2025 and 2026, which could eventually lead to declines in Interactive's net interest revenue, unless its margin loan book and cash balances climb significantly to offset them.
NASDAQ: IBKR
Key Data Points
Interactive stock could be a great long-term buy
Interactive Brokers is highly profitable, delivering $0.51 in earnings per share (EPS) during the second quarter, representing growth of 24%. The result carried the company's trailing-12-month EPS to $1.94 (adjusted for its recent 4-for-1 stock split).
That places its stock at a price-to-earnings (P/E) ratio of 32, which isn't exactly cheap considering the S&P 500 trades at a P/E ratio of 24.7. But the premium valuation might be justified considering the stock has consistently beaten the index since going public in 2007.
As I mentioned at the top, Interactive stock is up by more than 700% since then, which translates to a compound annual return of 12.5%. That's better than the average annual return of 10.1% from the S&P 500 during the same period.
It's possible Interactive's valuation becomes a barrier to further upside in the short term, but with quarterly customer growth of at least 30% for the past three consecutive quarters, soaring trading volumes, and record client equity, I think its stock is in a great position to continue beating the market over the long term. Thanks to the recent split, investors of all kinds have an opportunity to own one full share.
