Idea Tracker Update, Part 4: Interactive Brokers

I’ve slowed down the updates since it’s my favorite time of year in Toronto – when it gets warmer.

Interactive Brokers reported their q1 results today and I believe the brokerage business remains on track to generate just under $1B in pre-tax earnings power by 2016.

ibkr valuation

They say bulls make money, bears make money, and pigs get slaughtered.

I guess I’m a bull on Interactive Brokers…


  1. Appreciate the update.

    What are yor thoughts on the durability of the moat which their technology is currently offering?

    Could HFT brains go to this business and compete?
    What would be the replication cost?

    Just thinking outloud my worries for this, otherwise, superb business.


    1. My view is that the technology is not impossible to replicate but due to the shear amount of work required it would take a very, very long time. IBKR has already scaled its platform to the point where I’m comfortable that the share price we’re paying today affords us a large margin of safety in the event that an aggressive emerging competitor would try to replicate its platform and scale itself to strong competitive position. As long as IBKR’s moat continues to widen, which I believe it is, this risk should become smaller over time.


  2. Based on Peterffy’s estimation that Brokerage will generate $1 billion of pre-tax income on a run-rate basis late next year, the company is trading at a ridiculously cheap 13x that number, which implies something like 17x fully taxed p/e. This also gives no credit to the book equity or earnings of the market maker, which is worth a few dollars per share.

    This business should trade for more like 30-40x p/e in line with its growth rate.

    Regardless, we should have a $60 stock in the next 12 months, at which point investors will be looking forward to 2017 pre-tax of probably $1.5 billion.

    You get to a similar price per share, by the way, by giving IBKR the same P/TBV that Schwab has (4.2 or so), but of course that number gives no credit to forward earnings.


  3. They need to make it easier for the average person to use. There is a tremendous value proposition to customers but they won’t take huge share until they develop the skill that Apple has at making the complex accessible.


    1. Apple tailors itself to the premium mass market – IBKR markets itself to a specific segment of the market where the “user experience” is not the most important factor in the value proposition. They are taking huge share, by the way, in their target market. This is evident in the growing proportion of institutional accounts in their customer mix. The other big 3 or 4 US based brokers tailor their services to the retail market, and that’s totally fine, and I think even favourable for IBKR long-term, since there is ample runway in this market for these guys to grow in which should mitigate the risk that they start entrenching or entering IBKR’s market in the event that they are starved of growth. IBKR has multiple trading platforms as well, including a web/browser based one that perhaps less sophisticated investors can better appreciate.


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