Interactive Brokers: Initiating Coverage With a Narrow Moat Rating and $113 Fair Value Estimate

We are initiating coverage on Interactive Brokers IBKR with a fair value estimate of $113 per share and assign the company a Morningstar economic moat rating of narrow, Uncertainty Rating of High, and capital allocation rating of standard. Interactive Brokers is an online broker that facilitates the trading of both U.S. and international clients. The company offers a wide variety of products, including stocks, options, futures, foreign exchange, bonds, etc. While market-making was a significant revenue driver in the past, the company divested the business in 2017 due to high volatility and low returns. We believe Interactive Brokers is now well positioned to see revenue growth by focusing on a pure brokerage business.

Interactive Brokers benefits from cost advantages based on the fixed-cost nature of the brokerage business. We assess the company has developed sufficient scale to spread its fixed costs, invest in its technology, and compete with peers.

Interactive Brokers invests idle cash of client accounts into short-term U.S. government securities and is benefiting from its short-duration strategy in the currently high interest rate environment. We expect the company will grow its total client equity at a compound annual growth rate, or CAGR, of over 14% over the next 10 years. Because clients generally hold a consistent portion of their accounts in cash, the total client equity growth should drive a net interest income CAGR of more than 10% in the next 10 years.

We hold a less optimistic view toward commission revenue. We anticipate a gradual contraction in trading commission per order, which has been a trend across the industry. Our forecast of commission revenue is a high-single-digit CAGR over the next 10 years, due to lower pricing partially offsetting strong account growth. We anticipate Interactive Brokers’ operating margin will normalize to around the mid-60s going forward.