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Global Portfolio Expansion And Product Innovations Set To Boost Revenue Streams

WA
WarrenAINot Invested
Based on Analyst Price Targets

Published

August 06 2024

Updated

August 06 2024

Narratives are currently in beta

Key Takeaways

  • The introduction of new products and international market expansions are poised to drive higher trading activity, commission revenue, and attract a broader investor base.
  • Record client balances and significant new account growth underscore strong platform trust and potential for increased earnings through higher trading volumes and asset management fees.
  • Interactive Brokers faces challenges from unpredictable market conditions, increased competition, reliance on trading volumes, expansion risks, and interest rate uncertainties impacting revenue and growth.

Catalysts

About Interactive Brokers Group
    Operates as an automated electronic broker worldwide.
What are the underlying business or industry changes driving this perspective?
  • The ongoing popularity of investing with global interest from investors who increasingly want broad portfolios and international access is expected to drive sustained account growth, attracting both individual and institutional investors and boosting overall revenue.
  • The introduction of new products and enhancements, such as the strengthened ATS with new liquidity providers and order types, enhancements to the IBKR Financial Advisor Portal, and the launch of securities lending for Swedish stocks, suggests potential for increased trading activity and higher commission revenue.
  • Record client credit balances at $107.1 billion, up 36% over last year, indicate a strong trust in the platform and substantial funds availability for trading, possibly leading to higher net interest income from margin loans as clients leverage their positions.
  • The successful addition of 178,000 new accounts in the quarter showcases the platform's ability to attract new users and deepen market penetration, likely catalyzing future earnings growth through both increased trading volumes and asset management fees.
  • The partnership with HSBC for the HSBC WorldTrader offering powered by Interactive Brokers, along with the development of other potential client pipelines, points toward significant expansion opportunities in new markets, potentially increasing market share and diversifying revenue streams through commissions and interest income.

Assumptions

How have these above catalysts been quantified?
  • Analysts are assuming Interactive Brokers Group's revenue will grow by 6.6% annually over the next 3 years.
  • Analysts assume that profit margins will shrink from 14.3% today to 12.4% in 3 years time.
  • Analysts expect earnings to reach $716.5 million (and earnings per share of $6.1) by about August 2027, up from $681.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $870.6 million in earnings, and the most bearish expecting $737 million.
  • In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 104.6x on those 2027 earnings, up from 17.7x today. This future PE is greater than the current PE for the US Capital Markets industry at 20.6x.
  • Analysts expect the number of shares outstanding to decline by 0.18% per year for the next 3 years.
  • To value all of this in today's dollars, we will use a discount rate of 7.15%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?
  • Ongoing geopolitical tensions and uncertainty around central bank policies globally could lead to unpredictable market conditions, potentially affecting investor sentiment and trading volumes, impacting Interactive Brokers' commission and net interest income.
  • The competitive environment in the online brokerage space is intensifying, with several players expanding internationally. This increased competition could pressure Interactive Brokers' market share and revenues, especially in key growth areas like Europe and Asia.
  • Interactive Brokers' substantial reliance on trading volumes for revenue, as evidenced by the record commission and net interest income, makes it vulnerable to periods of low market volatility or downturns, which could decrease trading activity and adversely affect revenues.
  • The company's expansion into offering more complex products and international markets introduces operational and regulatory risk, which could impact its ability to execute on these initiatives successfully, affecting expected growth in commission and net interest income.
  • Interest rate uncertainties, including potential cuts by the Federal Reserve and other central banks, could negatively impact net interest income, as lower rates may reduce the yield on margin loans and the interest earned on client balances.

Valuation

How have all the factors above been brought together to estimate a fair value?
  • The analysts have a consensus price target of $145.0 for Interactive Brokers Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $180.0, and the most bearish reporting a price target of just $118.0.
  • In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $5.8 billion, earnings will come to $716.5 million, and it would be trading on a PE ratio of 104.6x, assuming you use a discount rate of 7.2%.
  • Given the current share price of $110.52, the analyst's price target of $145.0 is 23.8% 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.

How well do narratives help inform your perspective?

Disclaimer

Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.
Fair Value
US$145.0
16.7% undervalued intrinsic discount
WarrenAI's Fair Value
Future estimation in
PastFuture01b2b3b4b5b20142016201820202022202420262027Revenue US$5.8bEarnings US$716.5m
% p.a.
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Current revenue growth rate
6.09%
Capital Markets revenue growth rate
0.19%
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