Tags
e-brokers, economies of scale, EOS, growth, IBG, IBKR, Interactive Brokers, low cost, niche, scale
Interactive Brokers Group (IBKR)
10 Wednesday Dec 2014
Posted in Moats
Punch Card Investing
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10 Wednesday Dec 2014
Posted in Moats
Tags
e-brokers, economies of scale, EOS, growth, IBG, IBKR, Interactive Brokers, low cost, niche, scale
I’m amazed by the poll results, the presentation was concise with good flow.
There’s a time and place for lengthy blog posts, especially when it comes to subjective evaluation of management etc, but for straightforward analysis this kind of presentation is in my opinion optimal.
Projecting DARTs is hard enough on a daily or monthly basis, let alone 10 years into the future (basically the same as projecting market volumes over the same period).
As an alternative may I suggest that you try this again by separating the broker and market maker, and projecting account adds at the broker? You can then make some educated guesses on average brokerage revenue per account.
You should also read a little further into the different pretax margins of the two segments and understand how those have evolved over time. Peterffy thinks the brokerage’s pretax margins could expand to 70% in 2-3 years and he appears to be on that path.
This will all give you a better sense of what total profits could look like in 10 years. I think you’ll end up with a more attractive investment case.
I get your point on projecting DARTs. Its a fool’s game to a certain extent. But, (1) on the latest call, Peterffy indicated that their DART growth is now independent of the market and (2) I feel over the long term I feel confident that stock market volumes will grow. I think its harder to project DARTS on a daily or monthly basis than over the long term. Its like interest rates. I can’t predict what the Fed will do in the short term, but I feel pretty confident saying that interest rates will go up.
That being said, there is certainly nothing wrong with projecting account adds and revenue per account instead. I considered this approach and abandoned it because I felt that DARTs were the most fundamental driver of value. In any case, I will add this to the blog shortly.
I decided to take Peterffy’s projections with a grain of salt. He also thinks that 17% DART growth is sustainable. Maybe I am being overly cynical but I decided to discount these projections as overly optimistic.
Thanks for your input!
To Ian’s point, aren’t brokerage margins already well over 50%? Given the economies of scale you note, what project them at 50% going forward?
Over the last 5 years, Brokerage IBT margin has averaged 50%. Over the past 9 years, its lower.
I’m not sure how to post a photo on here so instead I can just say that if you plot quarterly brokerage accounts vs. pretax margins they appear to be correlated (up and to the right).
This makes sense for a business with higher fixed costs as their platform is levered to account growth. Another way of looking at this is incremental pretax margins, which have been in the high-80% range for two years.
Why do you average historical margins when the thesis is that the business will benefit from economies of scale and already has margins above the 5-year average? In other words, how is your margin thesis consistent with your thesis that the business will grow?
What’s up with your return calcs? You say value today is $10.6B? It’s $1.6B…your exit valuation in 2013 implies 27+% CAGR, not 3%!
Evan – $1.6B is the value of the publically traded shares. The shares held by the public are just 13.6% of the total. This yields a total value of $10B ($1.6B/.136).
Hope this helps,
Andy
Market cap is 1,6B dude, there are around 50M shares oustanding that works out around 1,5B at current prices…
You guys are driving me crazy. Have you ever heard of EDGAR? Public float is only 13% of total equity. I have calculated total value of equity not just publicly traded portion.
Uhm. Here’s the 10-Q:
https://investors.interactivebrokers.com/en/index.php?f=2244&t=10-Q&i=101&d=2014-11-10&a=1415658050&fmt=pdf
“Class A – Authorized – 1,000,000,000, Issued – 57,247,149 and 54,788,049 shares, Outstanding – 57,104,682 and
54,664,095 shares at September 30, 2014 and December 31, 2013”
Class B – Authorized, Issued and Outstanding – 100 shares at September 30, 2014 and December 31, 2013
“Authorized” shares include treasury shares, which are owned by the company and not counted for valuations.
This is a great stock and I’d hate for such a simple error to ruin the whole analysis.
I have no idea what point you are making. In any case, I am done debating what economic ownership % adheres to the common stock. If you think my valuation is off by a factor of 10 because of a “simple error,” you should take out a second mortgage on your home to buy the stock.
great analysis and simple conclusion. I like it.
Just to clear up the misunderstanding…yes, there are 57m (or whatever) shares outstanding…but the company that is listed only owns 14.1% of membership interests. Check note 1 to the financial statements. So total value is ~11bn…just think, how could Peterffy be a multibillionaire if the market cap was ~1.5bn
Thanks. I tried the Peterffy approach already and it didn’t work.
Great presentation. Do you have any additional comments on the tax rate? I know the process is quite complicated due to the fact of 1) tax shield due to IPO structure /Switzerland based company 2) consolidated holdings 3) significant international revenues. I’ve seen estimates for taxes as low as mid teens.
Thanks again.
I’ll try and write something up this week.
What happened to the report?
What do you mean?
Sorry, my brower wasn’t working correctly. I thought it was taken down. All good! And excellent analysis, as always. Thanks for all your hard work
Did you consider the possibility of a zero-commission-trading future?
The guys of the Robinhood (Google backed) app presumably made this reality; plus BoA & Wells Fargo are also trying to offer a limited number of zero-commission trades for high cash accounts.
Would love to hear your opinion.
I think IBKR appeals to an entirely different niche.
thanks for the post, especially on the brokerage industry landscape.
two questions maybe:
1) where do you typically get the info on the industry? any good survey?
2) on the numbers: on slide 22 brokerage revenue is ~650 m for 2007 while on slide 27，net revenue is 425m. my take away from the 10k is that these numbers should be very close.
appreciate any feedback.
maybe just one more suggestion on how to deal with the comment from those who clearly didn’t do their homework: just ignore them
brooklynn investor does that all the time. reduce your stress and time for blogging significantly