A first look at Interactive Brokers
I have a friend to thank for sending me down the hole of adding a new stock to my radar...
This friend recently sent me a post on social platform X about Thomas Peterffy. He's the founder and 70% owner of multinational brokerage giant Interactive Brokers (IBKR).
Peterffy is also one of the richest men in the world. Right now, the Bloomberg Billionaires Index puts him at No. 21.
The post on X is from business publication Colossus. It teases an in-depth profile of Peterffy.
I was intrigued enough to read the entire article and was blown away... It's a truly amazing, inspiring, only-in-America story. (I highly recommend reading the whole thing.)
After escaping Hungary and coming to New York City at age 21, Peterffy later got into finance by happenstance:
By 1967... Peterffy was flat broke and certain of one thing: this was not the America he had imagined from those green Statue of Liberty stamps. He couldn't afford another semester at NYU, and when someone mentioned Janos Aranyi, a Hungarian who was making money helping Wall Street firms learn how to use computers, he spotted his escape.
He found Aranyi's office and asked for work. Before they had finished discussing the job, Peterffy made an unusual request: could he have $50 right now? Aranyi blinked. No one had ever asked for an advance before starting work, but he took pity and reached for his wallet.
As the article continues, Peterffy's consulting work introduced him to finance:
Most clients wanted the same reports that compared securities across various metrics like price-to-earnings, book value, and earnings growth rates. Peterffy wrote programs in Fortran, fed stacks of punched cards into room-sized IBM mainframes, and waited as the machine hummed and clicked through calculations. The results emerged on green-and-white striped paper, which he tore along the perforations, organized into folders, and delivered to clients each week.
In 1993, Peterffy launched Interactive Brokers.
Today, the company is worth close to $120 billion. And its massive reach spans 36 countries across the globe. The company operates in 28 currencies and in more than 160 market centers.
Interactive Brokers also boasts more than $700 billion in client assets. And last year, the company hauled in $5.2 billion in net revenue and $3.7 billion in pretax profits.
As the Colossus article continues, Interactive Brokers still operates on Peterffy's original idea: "automate everything." Here's more from the article:
That ethos drives the business to charge fees so low that rivals no longer try to compete on price. Instead, they offer "free" trades while harvesting profits through hidden spreads. Interactive Brokers remains the platform of choice for hedge funds, professional traders, and anyone who understands that there are no free lunches on Wall Street.
Well, $3.7 billion in profits on $5.2 billion in revenue certainly catches my eye. And I've heard nothing but great things about Interactive Brokers from my friends who are customers.
So today, let's take a "first look" at the business...
Let's start with the stock itself...
Interactive Brokers went public in early 2007. And the stock didn't do much during its first decade.
But it has been on a tear for the past three and a half years. In fact, it hit an all-time high yesterday.
In the chart below, you can see the surge higher in recent years:
As is the case with most stocks, it has tracked the profits of the business. Take a look at this chart of Interactive Brokers' revenue and operating income:
The company has become a free-cash-flow ("FCF") machine. And it has almost no capital expenditures ("capex"). This next chart tells the story:
Due to balance sheet fluctuations, these are weird numbers ($15.1 billion of FCF on $5.7 billion of revenue?). So I would focus on the income statement for a true picture...
The company's balance sheet is very strong, with about $4.7 billion in cash and no debt.
As for capital allocation, it's so boring that it's not even worth showing a chart. Interactive Brokers hasn't made a significant cash acquisition since 2007. And over the past year, it hasn't bought back much in stock... and has paid out roughly $116 million in dividends. (The stock currently has a roughly 0.5% yield.)
Overall, Interactive Brokers is an incredible business that's growing rapidly by offering customers exceptionally low costs. And yet, it still has mouth-watering margins.
But with the stock at an all-time high, that naturally raises the issue of a high valuation...
Interactive Brokers closed yesterday at $70.95 per share. That gives the company a market cap of about $120.6 billion. Factoring in roughly $4.7 billion in cash, as of yesterday's close, the company has an enterprise value of about $115.9 billion.
Analysts expect Interactive Brokers to earn $2.03 per share this year and $2.20 per share next year. So as of yesterday's close, the stock is trading at about 35 times this year's estimates and 32.3 times next year's.
These are rich multiples. But they aren't crazy for a company of this quality.
I would say that the stock is fully valued rather than overvalued. So I would be keeping an eye on Interactive Brokers for a pullback.
If it happens to the extent that the stock looks compelling enough to add to the model portfolio in our flagship Stansberry's Investment Advisory newsletter, our subscribers will be the first to know – as always.
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Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.