Interactive Brokers (NASDAQ: IBKR) is the largest electronic trading company in the United States in terms of total daily average revenue. It offers many asset classes, margin trading, research and many other features. The company’s stock price surged during COVID-19 but has declined slightly since. At this time, we are concerned about the potential for future growth of the company given its current price.
Stay at home and exchange
Average trading volume has skyrocketed in 2020 and 2021, with retail investors using online brokers to invest their savings and stimulus checks.
With people stuck at home during COVID-19, many have turned to e-commerce. While the influx of retail investors has often led to market turmoil, one industry was sure to profit: brokerage houses.
Interactive Brokers claims to be a commission-free trading platform. This means that he does not charge any fees to his customers. However, this is only true for certain types of transactions and certain types of accounts. On many transactions, Interactive charges fees to its customers, which is its primary means of generating revenue. The company also allows its clients to trade currencies and other assets on margin and generates income through the interest rates on the loans they take.
During COVID-19, Interactive Brokers experienced an increase in activity unlike any it had ever seen. The platform went offline in December 2020, due to an insane amount of activity overloading their servers. Despite this, the company is helped by its reputation and intense marketing campaign, which resulted in a massive increase in total trade volume in fiscal year 21. As of November 2020, the company had 1 million active accounts, or more than 50% more than at the same time in 2019. The platform also executed more than double the transactions compared to the previous year.
As such, it’s no surprise that consensus estimates show the company generates more than $ 2.7 billion in revenue in FY21, down from just over $ 2.2 billion. dollars for fiscal year 20.
This is where the good times end
While it is clear that the company is doing exceptionally well compared to previous years, one fact makes us worried: we believe that everything has already been valued in the stock. On April 1, 2020, the company was trading at $ 41. At the time of writing, it is trading at $ 63 and is changing. Given that the company has grown by around 50% and the share price has seen a similar rise, we doubt the company can continue on this growth path.
The point is, many of the new customers who started using Interactive Brokers did so because they had nothing to do during the pandemic. In fact, many brokerages have referred to the increase in investment on their platform as “play money,” indicating that new retail investors are not focusing on the long term. The brokerages themselves understand this and are struggling to retain their customers as market volatility decreases.
Indeed, consensus estimates show a drop in revenue of over $ 100 million in FY22, indicating that new traders will have less time to engage in trades once we recover adequately from the market. the pandemic. Operating profit and net profit are also expected to decline in FY22. We have reason to believe the estimates are correct.
What the future holds
We believe the company is not well positioned in the event of a market downturn. Right now we’re in a booming stock market, with indexes breaking all-time highs once every few months or so. The rising market is also encouraging new retail investors to trade, in the hopes of making a quick profit. However, we don’t know how Interactive would behave during a bear market, especially since many new users may leave the platform after losing money (as we saw during the dot-com crash). com).
Companies like Robinhood threaten the position of Interactive as a leading broker.
It is also necessary to underline the increase in competition with which Interactive is now confronted. With companies like Robinhood (NASDAQ: HOOD) gaining momentum because of their ease of access, it will be difficult for companies like Interactive to compete for new investors. Robinhood offers a much simpler platform. While this may not be enough for professional traders executing advanced trading strategies, it is suitable for new investors looking for an easy to use app. Robinhood was recently the subject of an IPO, and energetic young startups like them are bound to be a problem for older companies like Interactive.
Basically, it’s doubtful that the company is gaining new users at the same rate it gained them in 2020. As such, it’s hard to recommend Interactive Brokers at this point. The company would be an attractive buy at a lower price, but the stock looks overvalued at worst and adequately priced at best right now.