As Donald Trump is set to begin his second Presidential term on Jan. 20, 2025, Interactive Brokers Group, Inc. IBKR is poised to be one of the beneficiaries, given the expansionary fiscal measures and pro-business stance of the Trump-led administration.
 
IBKR stock has risen 23.2%, outperforming its industry, Zacks Finance Sector and the S&P 500 index since Nov. 5, 2024, when the presidential election took place. IBKR has also fared better than its close peers – Charles Schwab SCHW and Tradeweb Markets Inc. TW over the same time frame.

Price Performance Since Nov. 5, 2024

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Moreover, interest rate cuts aided Interactive Brokers’ growth trajectory by improving liquidity and boosting market participation. The Federal Reserve has reduced interest rates by 100 basis points since September 2024. The Fed intends to continue the rate cut spree in 2025, though at a slower pace. This will likely support IBKR’s trading revenues to some extent.

Industry-Wide Tailwinds to Aid Interactive Brokers

Tax Cuts: The brokerage industry is set to benefit from the Trump-led administration as anticipated tax cuts will likely increase disposable income for individuals, inducing further retail investment activity, and leading to higher trading revenues. Moreover, tax cuts will boost profitability for corporates, enabling higher reinvestment capabilities in technology and infrastructure.

Favorable Regulations: Favorable regulations will lower compliance costs for brokerage firms allowing easier introduction of innovative products and services, including crypto-related offerings. This will enhance product velocity for industry players to capitalize on emerging trends rapidly and gain market share.

Domestic Manufacturing & Tariff Policies: A focus on domestic manufacturing alongside deregulation and tax cuts will likely foster economic growth, resulting in higher institutional and retail trading activity.
 
Additionally, expected tariff policies could increase market volatility, boosting trading volumes, and benefiting brokerage firms through higher commission income and spreads. Interactive Brokers is well-poised to benefit from this as it engages in diverse financial instruments, including commodity, foreign exchange, and equities.

Interest Rate Cuts: Interest rate cuts combined with higher disposable incomes for individuals will expand the margin book for brokerage firms, leading to higher net interest income. IBKR has witnessed a consistent sequential expansion in its client margin loans in the past three months.
 
Other Emerging Industry-Wide Trends: Emerging trends such as 24-hour trading, fractional share trading, no-commission model, AI-based investment advisory services and expansion into alternative investments such as cryptocurrencies amplify the brokerage industry’s growth potential going forward.

Interactive Brokers has already adopted several trends, such as 24-hour trading for selected securities, no-commission model, fractional share trading, and trading in crypto and other alternative asset classes, signifying its capability to cater to investors’ rapidly changing demands.

Growth Initiatives Undertaken by IBKR

Technological Excellence: Interactive Brokers’ technological superiority remains one of its strongest aspects. The company processes trades in stocks, futures, options and forex on more than 150 exchanges across several countries and currencies.
 
IBKR’s compensation expense relative to net revenues (11.5% in the first nine months of 2024) remains below its industry peers on the back of its superior technology.

Further, the company has been emphasizing developing proprietary software to automate broker-dealer functions, leading to a steady rise in revenues. Total net revenues witnessed a compound annual growth rate (CAGR) of 17.9% over the last five years (2018-2023), with the uptrend continuing in the first three quarters of 2024.
 
Net revenues are expected to improve further in the quarters ahead, given the solid DART numbers and robust trading backdrop on the back of higher market participation.

Sales Estimates

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Global Exposure through Product Diversification: IBKR has been taking several measures to enhance its presence globally. Last November, it launched Plan d’Epargne en Actions accounts to boost its offerings for its French clients. Also, the launch of IBKR GlobalTrader has enabled investors worldwide to trade stocks through mobile applications.

The company was one of the first brokers to introduce Overnight Trading on U.S. stocks and ETFs nearly 24 hours a day, five days a week. IBKR Lite has enabled investors to trade commission-free. Further, it launched cryptocurrency trading via Paxos Trust Company, charging commissions that are lower compared with other crypto exchanges. The introduction of IBKR Desktop, the next-generation desktop trading application for Windows and Mac, marks a new chapter for innovation.

Given the company’s technological superiority combined with easier regulations to improve product velocity will likely help the company’s net revenues through higher client acquisitions.

Bullish Analyst Sentiments

Over the past week, the Zacks Consensus Estimate for 2024 earnings of $6.81 has remained unchanged, while the same for 2025 earnings has moved 1.4% upward to $7.16 per share.

Estimate Revision Trend

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The projected figures imply a rise of 18.4% and 5.1% for 2024 and 2025, respectively.

Find the latest EPS estimates and surprises on Zacks Earnings Calendar.

IBKR Shares Are Overvalued & Offer Lower Returns

In terms of valuation, IBKR’s price-to-book ratio (P/B) is 5.05X, a premium to the industry's average of 2.17X. This suggests that investors may be paying a higher price relative to the company's expected earnings growth.

Price-to-Book Ratio Trend

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The company’s return on equity (ROE) of 4.82% lags behind the industry’s ROE of 11.77%. Further, the company trails its peers as well with SCHW’s ROE being 16.92% and TW’s ROE being 10.87%.

Return on Equity Trend

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Our Take on Interactive Brokers

Interactive Brokers remains well-positioned for growth in light of anticipated favorable policies to be implemented by the incoming regime and interest rate cuts. Further, rapidly evolving trends will likely benefit the company’s revenue growth and market share expansion.

Nonetheless, hefty valuations and lower returns remain concerns. Despite that, IBKR’s technological expertise and product diversification efforts to strengthen global exposure will likely benefit going forward. Bullish analyst sentiments are a tailwind too.

Thus, the stock remains a lucrative bet for investors. Currently, IBKR carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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The Charles Schwab Corporation (SCHW) : Free Stock Analysis Report

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