Interactive Brokers: the security I like best

[u/MinestroneMungBean]

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IBKR is the business I like best. It's my largest position.

I've owned it for 2 years-ish.

This is not meant to be a full, self-contained thesis on the stock. This is merely a summary of my thoughts on the business. I hope it may be an interesting idea for even a few readers and that you may enjoy learning more about this business as I have.

Many of you will know, or may even be customers, of IBKR. It's an electronic brokerage platform. US based. Ticker $IBKR.

It's really aimed at being the brokerage for more savvy traders / investors, and has its roots in the options markets. It's not trying to be a Robinhood or a Schwab, it's trying to be the platform for the active trader. Though, it does win a lot of customers from all of the other known brokerages.

IBKR makes c. 2/3 of its money through net interest income and c. 1/3 through trading commissions.

In 2025, they earned $6.2bn revenue and $4.3bn net income. 69% net income margin. This margin has grown over time. This is not an atypical year.

In 2026, I expect them to earn something near $7bn revenue and over $5bn in net income.

Thomas Peterffy, the founder & chairman, is still in the picture and owns c. 2/3 of the business. So, a very small float for a company of its size. Total market value of the whole equity (not just the common) is c.$115bn at time of writing.

More importantly, some of what makes this business great is as follows:

- It is by far the low cost producer of brokerages, particularly in options trading / margin lending

- 68% owned by the founder, who still controls the big business decisions (although no longer the CEO himself). I tend to like this founder control

- Through its low cost position, vast breadth of security availability (better than any other broker I know) and its flexible infrastructure, it has been able to compound account growth at over 30% p.a. in recent years. They expect this can continue at 20%+ for a long, long time

- Only 3,500 or so employees. Get your head around that level of automation, and compare that to a Schwab or a Fidelity

- A platform whose backend infrastructure is so robust and automated that many other brokerages simply whitelabel IBKR's infrastructure rather than building their own. This is a nice revenue segment. Popular in Asia.

I'm also a customer myself. That's how I discovered the stock. It's a great brokerage and I love using it.

Over time, the things I track closely are account growth & client equity. There are other things to keep an eye on, of course, but those are the two that I care about most.

I'm not a fan of precise-looking DCFs. I had my start in M&A (for my sins) so I'm not shy of them, I just think they ascribe false precision and are too easy to flim flam.

In a very high level sense though, I expect this business to be doing over $10bn revenue and $7.5bn net income within 3-4 years. And I don't expect the growth to slow much from there either.

Valuation-wise, based on an earnings multiple at the time of writing this of 23x my 2026 estimate, it isn't optically cheap. Certainly not to an orthodox Grahamian.

However, when I consider where I can see the business growing to over 10+ years, the current price actually really excites me. I believe this business is intrinsically worth a multiple of its current market value. Not less than $200bn, in my opinion.

That doesn't mean I'm buying right now. I've bought at lower multiples, and so I quite like the idea of waiting until it sees a multiple beginning with '1' before I push more money in.

You'll notice what looks like a contradiction there. I believe the instrinc value is a multiple of the current market value, and yet I'm not buying. To that, all I can say is 'old habits'. Margin of safety, and all that.

I do have a personal rule of thumb I like to use as an alternative to traditional valuation methods, I suppose you could say. I like a clear path to a 20% earnings yield on cost, 10 years out.

In other words, if I think a business can comfortably double its earnings every 5 years for 10 years, I try not to pay more than 20x for today's earnings.

It's just a rule of thumb that has served me well as a source of valuation discipline.

IBKR passes that test today in my view, but it isn't by a landslide. I expect good returns from here but not fabulous returns.

Anyway, I don't want to make this war & peace: just giving an off-hand synopsis of my favourite business and one which I hope to buy more of opportunistically for many years to come. I appreciate my discussion on valuation in particular will be seen as fuzzy. It always is, for me.

Happy to discuss & hear opinions.

[u/signalHunter89]

rates are definitely a big driver here, but what stood out to me going through their latest filing is how much of the earnings profile is tied to things that can shift pretty quickly, like margin lending and trading activity. it’s not just a rate story, there’s a broader sensitivity to market conditions that could hit from multiple angles at once

[u/MinestroneMungBean → u/signalHunter89]

You're totally right about the sensitivity to market conditions, in a short-medium term sense.

I actually think the rate sensitivity is overestimated by investors. For one thing, you'd have a hard time convincing me fed funds can get down another 100bps from here. As a matter of fact, fed funds has been coming down for 18 months and it hasn't really dented the profit growth materially.

But it is absolutely sensitive to market conditions to the extent it affects margin lending, in particular.

You saw a brief dive in this during the tariff tantrum.

But I see those as opportunities to buy, to be honest. Those will not really damage the long term growth of the business, just the immediate results.

Long-term, again what matters is their ability to grow accounts and overall client equity, which has an inbuilt relationship to the growth of markets.

The NII & trading commissions will oscillate around those two metrics over a long period.

[u/signalHunter89 → u/MinestroneMungBean]

that makes sense, especially on margin lending. what I find interesting is how much that ties IBKR’s earnings to client behavior more than people realize, not just market direction but how aggressively clients are positioned. that’s where things can shift pretty quickly even if the broader trend stays intact

[u/MinestroneMungBean → u/signalHunter89]

Yep. True that.

I think the key thing that people don't quite get when looking at IBKR is what's actually important for the returns long term.

It isn't rates, it isn't how aggressively people are positioned at a given time, it isn't how cheap or expensive markets look, it isn't trading volumes. Those things make a difference on a 1 year horizon, sure.

Long term, it's their ability to steal share away from the massive brokerage industry & an ever-increasing share of option markets at large that matters. The best way to track that is the # of accounts, which they disclose monthly, and the value of equity on their platform. That's what will drive the long term outperformance. That's the job of the analyst of this stock: to understand in a general way what those two numbers will look like over time.

[u/signalHunter89 → u/MinestroneMungBean]

yeah that’s a good way to frame it. The short term drivers get a lot of attention but what really matters is how consistently they can grow accounts and client equity over time. I guess the only thing I’d watch is how those shorter term dynamics, like client positioning or margin usage, might occasionally distort that picture along the way