Rising Global Market Participation And Prime Brokerage Expansion Will Drive Long-Term Upside

Catalysts

About Interactive Brokers Group

Interactive Brokers Group operates a global, technology driven brokerage platform that provides low cost trading, financing and investment tools to individual and institutional clients across asset classes and regions.

What are the underlying business or industry changes driving this perspective?

• Relentless global account growth across all client types, with accelerating milestones in client equity and cash balances, positions the company to compound commission revenues and net interest income as more active traders and investors consolidate assets on its platform, supporting durable earnings expansion.
• Structural rise in worldwide market participation, including record options and equity trading volumes and increasing use of sophisticated products such as forecast contracts and overnight trading, may continue to favor Interactive Brokers low cost, automation heavy model, widening its revenue base while leveraging fixed costs to enhance net margins.
• Strengthening prime brokerage franchise, evidenced by its climb to the top tier of hedge fund service providers alongside the largest global banks, is likely to attract larger and stickier institutional relationships that drive higher margin financing, securities lending income and more resilient fee based revenues.
• Expanding digital asset and crypto infrastructure including recurring buy features, broader geographic coverage through partners like Zero Hash, asset transfers, staking and stablecoin funding, positions the company to capture wallet share as regulated crypto adoption grows, adding new transaction streams and interest income that support higher total revenues.
• Ongoing innovation in tools such as Connections, investment themes and global tax advantaged account offerings, built on decades of product and geographic expansion, deepens customer engagement and cross selling, which may increase assets per account and trading intensity over time, lifting both commission revenue and earnings.

Assumptions

This narrative explores a more optimistic perspective on Interactive Brokers Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Interactive Brokers Group's revenue will grow by 8.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 15.3% today to 18.7% in 3 years time.
• The bullish analysts expect earnings to reach $1.4 billion (and earnings per share of $2.94) by about December 2028, up from $917.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.2 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 36.4x on those 2028 earnings, up from 31.2x today. This future PE is greater than the current PE for the US Capital Markets industry at 25.2x.
• The bullish analysts expect the number of shares outstanding to grow by 2.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.76%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A sustained decline in global benchmark interest rates from current levels would materially reduce net interest income, which management estimates could fall by around $417 million annually if rates decreased by one percentage point across currencies, putting pressure on earnings growth and net margins.
• If the recent surge in trading activity, options and equity volumes proves cyclical rather than structural, a normalization in market volatility or investor risk appetite could reverse the 23% commission revenue growth and record DARTs, leading to slower revenue growth and weaker operating leverage.
• Rising customer margin balances and increased risk appetite during momentum driven markets heighten exposure to a sharp market dislocation or de-risking event, which could reduce margin loan balances and securities lending activity, negatively impacting both revenue and net interest income.
• Regulatory shifts internationally, such as China’s clampdown on foreign brokers acquiring Mainland accounts and evolving rules around prediction markets, crypto trading and sports related contracts, may limit geographic expansion and product monetization, constraining long term revenue growth and potentially compressing margins through higher compliance costs.
• Crypto and digital asset initiatives, including stablecoin funding, asset transfers and staking, depend heavily on partners like Zero Hash and on obtaining and maintaining licenses in Europe and other regions, so delays, regulatory pushback or competitive responses from incumbent crypto platforms could prevent these offerings from scaling, limiting diversification of revenue and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Interactive Brokers Group is $85.0, which represents up to two standard deviations above the consensus price target of $77.33. This valuation is based on what can be assumed as the expectations of Interactive Brokers Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $85.0, and the most bearish reporting a price target of just $52.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $7.6 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 36.4x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of $64.15, the analyst price target of $85.0 is 24.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.