Chit Chat Stocks - Why I Bought Interactive Brokers Stock (Ticker: IBKR) - A Deep Dive

Episode Date: April 30, 2025

On this episode of Chit Chat Stocks, Brett dives into Interactive Brokers (IBKR) and why he has purchased the stock for his portfolio. We discuss: (03:33) The History and Evolution of IBKR (10:51) Understanding IBKR's Platform and User Experience (12:23) Growth and Market Share of IBKR (14:48) Personal Investing Journey and Transition to IBKR (21:52) Management Culture and Organizational Structure (28:23) Competitive Dynamics and Future Growth Potential (30:41) IBKR's Global Growth Potential (33:06) Tracking Account Growth as a Metric (35:03) Competitive Advantages of IBKR (35:26) Understanding IBKR's Culture and Management (38:38) Navigating the Competitive Landscape (40:51) Valuation Insights and Financial Metrics (49:42) Investment Decisions and Future Outlook (53:29) Macro Trends and Their Impact on IBKR ***************************************************** JOIN OUR NEWSLETTER AND FREE CHAT COMMUNITY: https://chitchatstocks.substack.com/  ********************************************************************* Chit Chat Stocks is presented by Interactive Brokers. Get professional pricing, global access, and premier technology with the best brokerage for investors today:  https://www.interactivebrokers.com/  Interactive Brokers is a member of SIPC.  ********************************************************************* FinChat.io is the complete stock research platform for fundamental investors. With its beautiful design and institutional-quality data, FinChat is incredibly powerful and easy to use. Use our LINK and get 15% off any premium plan: ⁠finchat.io/chitchat  ********************************************************************* Bluechippers Club is a tight-knit community of stock focused investors. Members share ideas, participate in weekly calls, and compete in portfolio competitions. To join, go to ⁠Blue Chippers and apply! Link: ⁠https://bluechippersclub.com/ ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Stocks. Before we get to this episode, we want to talk about our friends at Interactive Brokers. Interactive Brokers is the professional's gateway to the world's markets. Interactive Brokers offers commissions starting at $0 on U.S. listed stocks and ETFs with low commissions on other products, and there are no added spreads, ticket charges, or account minimums. Clients in over 200 countries and territories trade stocks, options, futures, currencies, bonds, funds, and more on 160 global markets from a single unified platform. Clients earn interest rates of up to 3.83%

on instantly available cash and pay margin rates up to 53% lower than the industry. You can also earn extra income on your lendable shares and IBKR's powerful award-winning trading platforms help every level investor succeed from beginner to advanced on mobile web and desktop. When placing your money with a broker, go with a broker you can trust.

Make sure your broker is secure and can endure through good and bad times. We use IBKR here at Chitchat Stocks for their best in class international coverage. And you can too, by heading on over to IBKR.com. Interactive Brokers is a member of SIPC. Welcome to Chitchat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation.

Now please enjoy this episode. Welcome to Chitchat Stocks. I am one of your hosts, Ryan Henderson, and I am joined as always by brett schaefer today we have one of our monthly research report episodes and brett is bringing to the table interactive brokers now you may have just heard an advertisement from interactive brokers if you're listening to this podcast i want to be totally clear about this this is in no way a sponsored recommendation to buy the stock and we will never have a recommendation to buy a stock by getting paid for it so this was no matter how much uh even though we get an email that people want us to do that about every single day uh so if you guys are listening to that the people

that spam our inbox please don't do that we have higher morals yeah so we we will never do that this is a totally independent research report um and it's actually a very compelling business and has been sort of one of the, I would say, one of the most under-discussed compounders of the last decade when you look at memberships. And we're going to talk about that and get into all that. But before we do, a couple of housekeeping items. I want to say, if you love this podcast, maybe even if you moderately enjoy this podcast, a review goes a long ways. It really, really helps. That is the best way to support the show. And Brett will also have all the show notes and research notes for this episode up on our sub stack, which is totally free. Everything we do

here is free. So if you want to get any of the charts and see any of the written work, you can do that as well. Chit chat stocks, just look it up. You'll be able to find our sub stack with that Brett. Welcome to welcome in. Let's talk IBKR. Give a little bit of history about this business. Yep. And I will say again, they are a sponsor of the podcast. Their product is a sponsor. The stock I researched on my own. And actually, I was inspired to research them because they were a sponsor. But in no way is this a recommendation because they are a sponsor. This is all my personal view. So yeah, let's get through the history. It's really a long history of innovation in financial markets. Interactive Brokers, otherwise known as IBKR, which we'll just probably interchange those two words throughout the episode, and its founder, Thomas Petterfee, has been an evolving presence. Wait, am I saying that right, Ryan? Petterfee? Petterfy? Petterfee? I believe it's Petterfee. Petter Fee. Okay. Well, Petter Fee has been an evolving presence in financial markets since 1965 when he arrived as an immigrant from Hungary. A computer programmer, automation and cutting edge digitization have been a part of the culture at IBKR up until today. All executives at IBKR must actually have experience as a computer programmer. So Ryan, unfortunately, even though we've coded some HTML websites in high school and college, we probably are not qualified to be leading this organization.

At his home, Ryan, you have some dad? Yeah, let me butt in here. For all the non-programmers, I know that's a little maybe discouraging that you'll never be an IBKR executive. But I read this when I was reading through your notes, and I actually loved this. And I will say, working at a software startup, which is – functionally, IDKR is basically software. This is such a huge deal. And having everyone – it's like its own language. It's like if you had executives that all spoke different languages, having everyone have that computer programming background makes the decisions a little easier and more clear cut. And you don't have to do quite as much explaining of why decisions are made because everyone has that same background. So I really like that. I think it probably helps with decision making at the company.

If I was going to start a company in Argentina, I better speak Spanish, not just English, or else it's going to be quite difficult to actually understand what's going on. But yeah, in 1977, I think maybe a little bit before that at his home, Petterfield developed a program on his personal computer to calculate the fair value of options. So kind of in that who's that guy, Edward Thorpe, the Black Skull stuff, he's kind of in that mold of, OK, well, there's these options things. Let's see if we can use computers, automations to start pricing stuff. And then in 1977, he purchased a set or a seat on the American Stock Exchange and became a market maker in options. He quickly professionalized the operation, founding TP & Co and growing the team to four members in 1979. And then in 1982, they formalized Timber Hill, which is a company which initially started as an options market maker. 1983, they created the first handheld computer for trading.

By 1987, they became fully automated and had its systems trading automatically with the NASDAQ system. So the NASDAQ computers, they're talking with them. they're making markets for options, helping, you know, the plumbing of the financial system keep going. And you could argue at this point that by 1987, they were the first humanless trader on Wall Street. And staying on the cutting edge of trade clearing and market making, Pederfy saw an opportunity to grow their presence in financial markets. So in 1993, the Interactive Brokers or IBKR brand was formed to make Timber Hill's execution systems available to everyday customers. They launched the Trader Workstation, TWS, and IBKR was catering

to professional traders looking for a wide breadth of assets to trade at a reasonable price. In the 1990s, Timber Hill started expanding globally. So this is the options market making stuff. And that gave IBKR a foot in the door to offer trading on all sorts of international markets for its clients. So if you look back to this period, this is where the ground was laid. This is where the foundation was laid for IBKR to have such a global presence and allowing individuals to be trading in all sorts of currencies, all sorts of stock markets, all sorts of options, futures, commodities, bonds, even though they're individuals where other platforms do not have that. We keep going in more detail, outlining every new asset class,

country they've added. I think they recently added Saudi Arabia. Actually, if you want to, you can use the Hong Kong Stock Exchange Connect thing. That's a very complicated way to invest in China. But there are really two more things I think investors today need to understand about IBKR's journey before understanding the stock. First, it divested of Timber Hill in 2017. Why did they do this? Because it was losing to competitors such as Citadel, and it wanted to focus on the crown jewel of the business, which was turning into the IBKR brokerage platform. Second, IBKR launched IBKR Lite in 2019 to cater to individuals with commission-free trades and an easier-to-use customer interface. I think this was in response to Robinhood, given the timing there

and the rapid rise of that and the evolving the business. I think these two launches or one divestiture and then launch of IBK or light, it is a great indicator of a culture that can focus on the long term, sacrifice some short term profits and understand that we have this vision. We have these things that we care about providing to customers, which is the breadth of opportunities to invest in financial markets and providing them the cheapest price possible. And regarding the options market making stuff, well, Citadel, some of the other ones were kind of eating their lunch and they said, look, we need to trim this. They sold it and we have IBK, which if you look at the stock price and you look at their financials back in the day, it doesn't really track and

accurately portray how fast the brokerage has grown, where we can look at customer accounts and stuff like that post 2017 and see such phenomenal growth. If you look at the history of management, Petrify served as CEO until 2019 when he gave the job to Malin Galik. Galik began with the company as a software engineer in 1990. They love internal promotions and have long executive tenures, which I thought was a good thing studying this because investors who plan to have a long tenure with the stock, should have management teams that also plan to be around a long time. You want this aligned. And when there isn't, when you have a recycling of CEOs, when people come in, these mercenary type CEOs, it can be difficult to deal with. And it's just better

when people want to stick around a company for the long time. So I think that adds the history, the context of where IBK got to what it is today. Ryan, any questions? And we can get moving. No, for anyone who is not familiar with interactive brokers in any way, the platform today – and I guess you could probably say this about the two platforms, both IBKR Lite and the original interactive brokers – it isn't the easiest on the eye. It's a little bit of an intimidating interface, especially relative to some of the newer entrants when you think about how much some of the other platforms have gamified things and made it sort of this. It's part of the brand, though, because if you're going for the quote-unquote sophisticated traders like ourselves, which I'm saying that facetiously, you want it to seem like this isn't some mobile video game. like Robinhood, where that can actually keep away the clients. If it looked like that, it could keep away the clients you're going after. Yeah, 100%. The only other thing I'd add is that, and Brett's about to touch on this, the functionality is really powerful. The platform

is really powerful and they have the digital infrastructure in place and the connections with international exchanges to really offer some best-in-class features and capabilities. And we're going to get into that. So what do you think makes IBKR superior to competitors? And who is it best suited for? Okay, let's get some context here. And Ryan's about to share a chart and talk about our good friends at FinChat. But I'll go through the numbers here for the Listeners, since 2012, IBKR has grown its active accounts from 200,000 in 2012 to 3.6 million as of the latest update, Q1 of 2025. That is a 26% annual growth rate. I can explain why investors switched to IBKR with my personal journey, but Ryan, first, why don't you talk about

a special advertisement from our friends at FinChat and the extra discount they can get this week. Yeah. We talk about FinChat all the time here. We use it for pretty much all of our episodes. Brett just talked about finding the active accounts. FinChat is a complete financial data platform for equities. So if you want revenue, earnings per share, all the standard financial metrics, you're going to have that. But if you want segments and KPIs, very company specific granular data you can get that too and right now as of this episode being released which will be on wednesday i believe that is the last day of april there is an extra 25 discount with our code that's finchat.io slash chitchat it's typically 15 off we don't run sales very often

we're running an elevated one to go with some new product launches but this is 25 off right now and it's finchat.io slash chitchat i'll leave it there through friday through what date yeah it'll probably be till friday morning might be thursday at midnight so if you're listening to this on either wednesday or thursday recommend getting it as soon as you can uh if you're hearing this on friday maybe shoot me a message and i might be able to uh give some wiggle room all right Beautiful. Okay. Let's get back to IBKR. I think my personal investing journey can help explain why someone would want to utilize this platform and switch over and why they are stealing market share from a lot of people or a lot of other brokerages. So historically, I was a Charles

Schwab guy. And that was simply because that is where I first opened a brokerage account in college. They had very cheap commissions. They had a wide breadth of ETFs. When you're starting out, you're like, okay, this seems good. It's pretty easy to use. And friction and switching costs, I think are pretty high with personal finance products, especially after moving over to IBKR. It does take, you know, it's a multi-step process. You got to talk with some customer support people. You're dealing with maybe some decently sized sums of money. So you don't want things to go wrong. However, though, as I expanded my investing horizons outside of the United States, I found Charles Schwab lacking in capabilities. I had a tough time investing

in Mexican stocks, European stocks, Japanese companies, and it got frustrating. You know, you research a company and you go, wait, am I even able to buy this easily? Or do I have this illiquid ADR that I can only trade five times a day that's only in the United States? So that is when I decided to make the switch to IBKR for all my investing needs for my Roth non-tax retirement accounts, and my personal account. IBK offers the ability to invest in all meaningful stock markets, trade all meaningful currencies, and from virtually every country around the world. And its automated systems that they built up over the decades make this seamless and allow them to offer very low fees for users. Personally, I can fund my account with USD, so with US dollars,

and buy any stock in the world on any exchange with a minimal foreign exchange fee that IBK performs automatically for me. So let's say I have a Mexican company I want to buy. All I have is USD in my account. I buy the Mexican stock, but what's going on on the back end is they're converting me from USD to Mexican pesos automatically at a good exchange rate for a very, very small fee. I actually did some research to see what's a better way. It doesn't work exactly the same way. The fees are even cheaper than the low cost provider like Wise. They perform automatically for me, buy it at my limit price or however I'm trying to buy it. And boom, it's there just in one click and it's there. Most FX conversions on other platforms or at a bank or

somewhere else will have a total cost of 1% each way, which makes IBKR a significantly cheaper offering if you want to invest internationally. And now there's more than just international investing in stocks, I would apply this framework to other asset classes. IBKR has or aims to offer the widest breadth of products with the best blended price in the industry. It is able to do this because of its consistent investment in automation and global presence. And when I say blended price, it doesn't necessarily mean commission-free, where if you're on IBKR Lite, It's pretty much a Robinhood copycat. They have payment for order flow.

There's no commissions, or at least for the most part, there's no commissions, but you might not get the best price possible. Now, if you're an IBKR pro, there are small commissions, but there's no payment for order flow. They do this smart routing thing that we talk about, I'll maybe talk about later, and it's just the blended price overall for a larger investor is going to be better. If we talk about why it's superior to other brokerages, we look at IBKR Lite. Yeah, it's like a digital first platform similar to Robinhood with free commissions,

relies on payment for order flow. However, compared to Robinhood, they have a much larger breadth of offerings available to investors. And I believe that's why IBKR will keep stealing share for investors looking for a truly better product. If you want to expand beyond Magnificent 7 ETFs, US-only stocks, index funds, if you want to expand beyond that, and not everyone at Robinhood will, but if you do want to expand beyond that, IBKR is going to keep you stealing customers. Then if we look at IBKR Pro, it's for professional investors or maybe higher-end investors. It operates on a cheap commission model across asset classes, and it attracts professional investors because of what we discussed before, wide breadth, cheap prices, but for other reasons as well.

For example, there is IB Smart Routing that automatically searches for the best price across all exchanges and dark pools for clients. Margin loans are the cheapest in the industry due to, once again, its automated systems that will close out positions for clients as well as just its lower overhead costs. Management says its North Star is offering the widest selection of asset classes. They even added prediction markets. And even though I don't believe in the sector very much, they added cryptocurrencies recently and they're adding more and more to the platform just because people want to trade it. They'll put it there. And they want to offer it at the cheapest price driven by automated systems.

I'm using the word automated, but again, this is what they're trying to build. Software first, most advanced, most automated. We don't need a whole huge overhead of people. And it wants to take whatever it builds in the United States and bring it globally to as many countries as possible. This is another important thing to note about IBKR is that a lot of its accounts are from outside the United States because the value proposition is even better for someone in a smaller market that historically had a difficult time investing in the United States, which if you're in the United States, you already have access across

all these brokerages to invest in the largest stock market in the world, where if you're in a foreign country, you probably want that's the first question you ask, well, do I have access to invest in the US market, the largest one, IBKR offers that which makes their value proposition much, much higher compared to the local brokerages. And it is doing so IBKR is with increasing efficiency, accounts per employee have risen over the years. If we look at 2013, which is just total accounts. I think I made this as a custom KPI on Fincha. That's another new product they have, which is quite nice. It was 272, maybe it was 1,000. No, it'd be 272. Maybe it's 272,000. I don't know. But it grew from that number to over 1,000. So 5x the efficiency. So they're able to

scale this up with their automated systems, with their software engineering approach. And it also shows that there are discipline and hiring practices, which is check, check, check for an investor like myself. Yeah, and just to clarify, it is – in 2013, there was 272 customer accounts for every employee. And today, there's more than 1,000 accounts for every employee. The customers-to-employees ratio is as long as the customers are still not a similar value to what they were. It's not like they're just totally diminished value customers. If the customers-to-employees ratio is going up, that is good for business. 100%.

Well, it's good for profit margins, which you can see by looking at their profit margins, which we'll talk about later. They're actually higher than Visa and MasterCard's. Quite astounding. Let's talk about management and culture, Ryan, but any follow-ups on the product and stuff like that before we get moving? No, the biggest thing I'll add, and I think customers get this, but for someone who isn't a customer, it's kind of maybe – we used the word automation there. We talked about all these kind of little technical intricacies that they have that are different. The moral of the story is that they don't cut corners. They have the – if you just want to buy commission-free the ADR of some international stock, you can do that with IBKR.

They've built out that functionality. But if you really want optimal execution and you want to buy the liquid security in the actual country from that country's exchange, IBAKR gives you that ability and is offering it at the lowest cost possible. And in general, it seems like one of the lowest – even though this is funny because they mark it on our podcast, it's less fluff and more true raw functionality. Right. They have all these wonderful deals like great interest on instantly available cash, lowest margin rates, best international stock trading. And I think people just overlook it. And so, yeah, I think the big takeaway here is that this is a unique tech-driven culture that doesn't cut corners. Let's talk a little bit about that management and culture, though. Maybe dive into pedigree a bit more and the overall culture for IBKR.

Right, yeah. What you talked about there with taking care of the customers, I think highlights the phenomenal culture they have built where they take care of their clients, whether it's a large hedge fund or a small individual account like myself, as opposed to a Robin Hood, which I believe takes advantage of their customers. They believe in hiring from within. IBKR does. They want software engineers leading the company as opposed to a finance marketing or consultant person in the proxy statement, Ryan. And this is another little, I think, green flag that is an indicator with someone who doesn't talk with management that it's a good culture of disciplined hiring, disciplined expense management. They state that they have never hired a compensation consultant, which, as we know, and both agree on, is just a complete waste of time. the very fact that they are able to retain employees for such long tenures tell me they

treat them well, which is a good thing. Now, let's also talk about the organizational structure, the ownership structure of IBKR. It's a little bit complicated. We'll have a graphic that they have from the annual report in our report on the sub stack. But the market capitalization of the class A common stock understates the actual market value of the business. And it can confuse some of the platforms, even like our friends at FinChat, because they have two ownership structures of the actual underlying IBKR brokerage. One is the publicly traded CommonA stock, which is 25.8% membership interest. And then there's this LLC that Petrify owns that doesn't, it's not like a class B stock. It only, I think, has 100 shares. So it can kind of confuse them, like the total

shares outstanding, but that LLC owns 74.2% of the underlying brokerage. So again, all you need to do to calculate the true market value of the stock is take that common stock, divide it by 25.8%, and that will take the current market cap from $18.45 billion as of this recording to $71.5 billion. So just watch out for that. If you see an $18 billion market cap for a company that generates four billion dollars in earnings with their growth rate it's probably good too good to be true um it's just got a confusing thing there and a lot of the automated systems screw that up uh besides that cultures rock solid i think i would compare it to the costcos the adians of the world they don't waste money on marketing uh which we can talk about like they they go with us

and i'd say they have room to keep spending with us because we are perfect podcast for them that's That's what we tell them, but they don't overpay. They're not doing a bunch of TV ads constantly like you see with Charles Schwab or Fidelity or all those people like golf tournaments, which I always think is funny. They're not going to have the IBK or Invitational like there is with the Charles Schwab Invitational. Besides that, yeah, the culture is great. I think it's really not that complicated. Now, the one concern is Petter Fies H. He is 80 as of this writing.

He could pass away at any time. He's the controlling shareholder. So I'm really, I don't know what's going to happen with that. I would assume he's a smart enough guy to have a succession plan and family planning along with that. As a shareholder that would hopefully is holding the stock in perpetuity. I wonder what happens with that as he eventually is going to pass away. Hopefully not anytime soon, but at some point he will this is a looming risk can they keep the culture intact without his influence i think they can but it's just something to watch out for yeah it's the other thing is and if you're a really long-term shareholder it might not matter too much but what happens

with the stake it could potentially put selling pressure or i assume it gets converted somehow into available shares for people um for the public so yeah it's kind of the same risk that like people have had with berkshire that buffett uh beyond buffett just leaving which would be important to the culture and the company uh there would be some actual like technical selling pressure potentially but like i said if you're a long-term shareholder that kind of stuff tends to work itself out over time let's talk about the competitive dynamics brett ibkr has been around for 50 years now more if i'm not mistaken the brokerage has been around since 1993 the roots of pederfy's efforts have been around for 50 years but the brokerage 30 years

roughly it feels like it's been around for a long time however you believe they have a long runway left to grow and it's potentially early stages for them. Talk about the competitive dynamics and where you think this business can go from here. All right. Well, they have 3.6 million active accounts and it's pretty simple to show why there is room to keep stealing market share because we can just look at the brokerage competitors that also track and give updates to their active accounts. And you can find all this on FinChat, by the way, the KPIs are all right there let's look at robin hood 25 million funded customers charles schwab 37 million active brokerage accounts okay add both those up we don't even need to go need to go into the fidelities

who am i forgetting vanguards everyone else we don't even i can do plenty of examples just in the united states uh there's look there's a reason they could 10x their accounts just by stealing all these ones now do all of these accounts need ibkr superior breadth of product offerings? No, but I think a good chunk will, and a good chunk do not understand that IBKR can save them a bunch of money every year. And I think IBKR, because of this, can keep stealing share year after year after year from these clients. And focusing on what they do in the United States is actually misleading because of how large the IBKR opportunity is around the world. At a conference a few years ago, Petrify stated that only 20.8% of accounts are in the United States, with international growing quicker than the United States, albeit with smaller account sizes.

Quote, so as I said previously, new accounts are smaller and new accounts are younger and non-U.S. To underline the strength of this trend, U.S. accounts represented only 21% of our total accounts, so obviously non-U.S. growing faster than U.S. customers. He's also not a no-nonsense guy when he's not talking platitudes at investment conferences, which is nice. There's actually one funny one where there is a transcript and there is apparently a fly getting in his way and he kept apologizing for that. So I think he was trying to swat a fly the whole time. So he's not afraid to just be himself, which I think is good.

Now, again, we talked about this already. The reason IBKR is growing so quickly in other countries is the same reason I like IBKR, but reversed and supercharged. Investors around the world want access to the largest equity market in the world, the United States. IBKR enables them to easily do so, which makes their value proposition compared to local competition even greater than their value proposition spread in the United States. With all this context, I think IBKR has room to grow its accounts for the next 10 to 20 years with no concerns on market satirization, as long as it maintains a better product for these quote unquote advanced traders that want to move beyond Robinhood.

I think they still can do so. Is Charles Schwab going to replicate this product overnight? No. Is Robinhood going to replicate this overnight? No. They also white label its solution for some international financial institutions, which I assume are other brokerages, banks, what have you, which I think will help it keep growing outside of the United States as well. And the reason I'm tracking active account growth is because as the number of clients grow, revenue should grow as well. The most important metric through the market cycle is going to be accounts growth. This is the best indicator of IBKR's future growth. Now, if we go into a huge bear market in 2025, revenue is going to take a bit of a hit. Earnings might take a bit of a hit,

But if accounts keep growing, the rest of the business, I believe, will follow suit over the long term. I join the calls pretty much every week and it's phenomenal for generating new ideas and receiving feedback from other like-minded investors. If you're interested in joining, head on over to bluechippersclub.com and hit apply. That's bluechippersclub.com. The link will be in the description. Yeah, it definitely feels like the ultimate metric to track. And I pulled up some of the numbers there but schwab and robin hood combined have 51 million active accounts interactive brokers right now has 3 million and like brett said that that doesn't include the vanguards the what are some of the other brokerage platforms fidelities of the world

suffice to say there is plenty of i mean there's plenty of people that could use a platform like this and the other one even with coinbase coinbase has absurdly high fees at least i think they historically did i'm not sure what it is now but ibkr is going to do the same strategy they have done historically we're going to offer cryptocurrencies for much cheaper prices margin loans for much cheaper we know they love that in the crypto markets people who want the cheaper prices will go over there even though coinbase is a much bigger brand within that sector Yeah. And we're seeing that momentum play out now. So I made this metric with FinChat's custom metric. Shout out again. You can get 25% off right now. In 2021, which was when we saw basically the everything bubble and equity markets were soaring, interactive brokers added 603,000 new accounts that year. over the last 12 months in a period when markets have been okay and actually in the last quarter

specifically uh they saw really strong growth interactive brokers added 870 000 new accounts so they're they outpaced their account growth relative to the 2021 everything bubble which is when like they were they were adding new accounts left and right in 2021 because everyone wanted to buy stocks. We're seeing them outpace that today. I think that's kind of the momentum and the product speaking for itself. And then on top of it, their balance sheet, you're going to talk about this here in a second, was in a much better place that allowed them to invest coming out of this interest rate hike as opposed to other companies, which kind of had to pull back on their customer acquisition investments. Right. Yeah. And that means, yeah, not only marketing,

but better interest on idle cash, better margin loans, stuff like that. Let's move on to the competitive advantage. This is an important thing for me, for Ryan as well, where I have three different core criteria that I run through as a checklist for a company. Do I trust management? We've gone through that. Is the stock cheap? We're going to get that at the end here. But do they have a competitive advantage and can it keep growing over the long term? That's the one we're going to cover right now. That's one of my three. I believe that IBKR has a competitive advantage over other brokers.

I'm not sure we can box them into one of the traditional moat categories. Is their economies of scale a little bit? Is their brand a little bit? Although some of their brand is honestly not that great because they have very poor customer support. So people complain about it all the time. do they have switching costs? Sure. But that's probably honestly a headwind for them to convince people to come over from Robinhood, Vanguard, and Charles Schwab. I think one, though, is culture.

Now, saying culture is a moat can be worrisome. It's rare where I think I'd use that legitimately when describing a company. But I think for them, the culture of staying on the cutting edge technologically, along with management, staying focused on the long term, taking care of both their employees and customers, is just really strong and has been exemplary throughout the last few decades. I think few companies have a culture moat. Costco, Adyen, maybe a few others we've talked about before. IBKR, I'd put up there with Costco and Adyen. Now, if we look at the competitive positioning, there's two people we need to talk about. The other upstarts and then the legacy players. So the legacy players with large physical footprints, large employee bases,

antiquated technology, they face an innovator's dilemma when competing with IBKR. They could scrap all their cash cows and try to catch up, but they will probably not choose to do this. And they likely can't if they tried. And they're making enough money with the 401k businesses, the ETF and index fund businesses, the wealth management offerings, IBKR is just not competing with that. And Charles Schwab is not competing with IBKR to offer hedge funds the cheapest price and the widest breadth of offerings, as well as individuals. And if we look at building global scale, that takes time. Similar to the remittance providers that we talked about, you have to talk with, there needs to be regulatory approval, banking stuff, all that good nonsense. You need

to work with the local market regulators. And if I was thinking about Robinhood, if they wanted to replicate IBKR's breadth of offerings today, it would take them years. And not to mention the payment for order flow, they would have to give up. But in that time, IBKR will keep marching ahead And I think will keep expanding its product offerings, meaning that Robinhood is never going to be able to replicate them. And as IBK advances its technology, which, for example, you know, that automated foreign currency thing that I mentioned, there's plenty of others out there. It moves further ahead of the Schwab's of the world. And as it adds more assets to invest in, it further expands ahead of the Robinhood's of the world. And I believe management really understands this is what is going to butter their bread.

This is what is going to get customers over to their platform. And they push that and keep working on that year after year after year. And as they move through the rest over the next 10 years, I think they can further expand this moat by just focusing on these two things. And it is something we can track fairly easily as investors. Yeah, it's one of those things. It's not as easy to put your finger on. like with amazon's they have with amazon they have a logistics advantage with visa they have

a network effect with uh brand whatever apple they've got a powerful brand google's got great digital distribution this one's it's harder to really see what the financial outcomes are of it But when you see continuous innovation and best-in-class product iteration and product improvement, I have to believe that eventually that shows up over time. Even if switching costs are pretty high and they are on the smaller side of things relative to some of their peers, I think it's – they're still in a good place. I would care a lot more about which way their moat is heading than the overall size of the moat. Yeah, they should have economies of scale and the switching costs will work in their advantage if they can keep people to, or excuse me, convince more and more people to come over. Because, again, for anyone that is going to switch to Abicare after this episode of that, you know, you follow my path and do the same thing as me. Ryan did it as well recently.

It's not easy to switch. But when the value proposition is that much better, you're going to do so. And I think they can keep doing that. Let's talk about valuing the stock. Another follow-up? No, let's talk numbers. Go through sort of your valuation work here. All right.

If we look at their – we talk about the culture of spending, discipline, and automation. It's very evident when we look at their profit margins. Over the last 12 months, it had a pre-tax profit margin of 72%. I believe it was actually 74% last quarter. This has grown from around 60% in 2019, and I expect this figure to grow slightly over the next 10 years, maybe a little bit, but a lot of the earnings growth from margin expansion is likely done because we're already at 72 cents on every dollar of revenue, which for anyone that doesn't know is higher than Visa.

I think that's fantastic. Revenue has grown at a 16% annual rate since 2015. If accounts keep growing quickly, I think revenue will fall in line and keep growing at a double digit rate. Really isn't that complicated. Right now, accounts are growing at a 30% year-over-year rate. I think given the fact that they might be over-earning a tad, depending on the long-term interest rates out there, maybe revenue grows a little bit slower, but either way, it should

be correlated with accounts growth. They run a conservative balance sheet, and they want to have a large buffer of capital to make its larger clients comfortable and maintain its superb product suite. CFO Paul Brody, who actually joined the company in 1987, by the way, another long tenure. When the tenures are all longer than we've been alive, that should be an indicator that they are focused on the long term and taking care of their shareholders. Here's what Paul Brody, the CFO, had to say on the last conference call. It kind of remains in the six to seven billion dollar range, which is their excess capital. you know of as this business grows we earn more and we have more capital and more of it is devoted

into the business to support things like customer trading clearing fund deposits where we are you know self-clearing in most places and various buffers that have to be maintained both for regulatory purposes and for standard operating liquidity buffers he's a little bit rambling but just take a lot of capital which is why we maintain it and you know we're profitable enough that to determine we could raise the dividend and still grow that capital so they want to have a super conservative balance sheet because of how they operate the business. But if we're going to translate that, we run a conservative balance sheet, but we are so damn profitable that we can keep growing the dividend too. I think that's not a bad place to be. They're going to keep

growing capital on the balance sheet and they're going to return more and more of its shareholders in the form of dividends. Now, this conservative balance sheet and the culture around staying nimble has also helped ibk manage the interest rate hiking cycle better than pierce if you remember charles schwab was close to crisis mode and maybe a bailout due to its holding long-dated bonds and mortgage securities at low interest rates in the hiking cycle of 2022 what was that 2023 i think it's 2022 2022 to early 2023 something like that yeah yeah i'm having a parts i'm remembering now but i think the hiking started in 2022 started in 2022 i think the panic was march 2023 that's when it kind of was really aggressive uh but ibkr they never reached for

yield they understood that look we got to stay flexible if they start raising interest rates we don't want these mortgages at three percent sitting on our balance sheet they just had a lot of short-term treasuries similar to the berkshire hathaway model that it could recycle into higher rates over time. As that happened, their net interest income exploded higher. I actually have a chart here that might not be their net interest income, but either way, interest income, net interest income exploded higher. And it also enabled IBKR to offer better interest paid on idle cash deposited into the accounts. And again, we don't recommend going on margin, but a lot of People do, and it gives them the best margin rates in the industry

because their cost of capital is, I guess, lower, and then blah, blah, blah. Yeah. Or excuse me, it's the opposite. They're earning higher rates on their asset side of the business, so they're able to offer their customers the – oh, wait, I'm getting it backed up. Whatever it is. They're earning more in interest income so they can offer a better product

to their customers. And if we look at their operating income, over the last 12 months, it was $3.877 billion. So let's say $3.88 billion. If accounts grow from 3.6 million at an average annual rate of 15% over the next 10 years, they will just reach under 15 million total accounts. That is lower than Robinhood and Schwab today, separately, by the way. And most of these clients right now are international. So I think there's a long runway to grow in the United States.

Now, if operating income growth tracks account growth, which I think it can with some slight margin expansion and the fact that revenue should grow with account growth, give or take, they'll reach $15.6 billion in operating income in 10 years. I think that is reasonable. Call me crazy. I mean, that's 5x from today, but we're trying to accurately assess what IBKR stock is worth. And I think there's no reason to think that over the next 10 years, again, some years might be slower than others. It's not going to be linear. There's some procyclicality with earnings with the stock market. If we go into a large recession for multiple years, people are going to stop trading so much. But I think this is well within reach

over a 10-year period. And if inflation is high, even better. Yeah, I think I don't take any issue with the numbers you've got there. The big thing is that you're taking like a normalized view. You're looking out 10 years in a normal world. There is a lot of sensitivity here to macro conditions. Like you said, market prices, where we're at in like a market cycle, like if there's been two or three years of recession, there's going to be less trading volume, that kind of thing. But also the interest rate sensitivity, interest revenue, net interest revenue, or net interest income, I should say, climbed a lot with this rate cycle. So if we saw rates come down substantially, you could see sort of a reverse impact there as well. And obviously, that kind of revenue specifically is very helpful to margins because there's no cost to serve interest revenue. The thing I love here about interactive brokers is I think this is like a perfect example and one that should be studied in business schools of management incentives and culture differences. because if you look at Schwab and you look at interactive brokers over the last five years,

and I love to use this chart because you can do it on FinChat. It's just a perfect example of two businesses run very differently. Interest income has soared over the last three years since the interest rates have risen for IBKR. For Schwab, they've gone nowhere. I think they're actually uh like maybe plus 13 versus interactive brokers which is up like tripled the big reason for that was i think schwab's management team which the company's been around for a long time is a lot of uh you know they're not owner operators like you get with thomas petter fee and so you have sort of shorter term incentives which they started to really reach for yield by extending the duration and so then when rates jumped they had a whole bunch of

assets or i think i believe it's on the assets of the balance sheet that were essentially underwater and ibkr was the opposite they basically just if i'm not mistaken rolled one month treasuries over and over and over so when rates started hiking they benefited by basically being as long-term focused and as patient as they could be. And now we're seeing the fruits of it. And it also allows them now to press the accelerator a bit, to go after more accounts, spend more money on marketing potentially, even though we're seeing still good operating leverage, potentially offer better interest for customers as well. Whereas Schwab is kind of unable to do that, given how kind of overextended they were. Couldn't have said it better myself. Nothing to add, Ryan.

Are you buying Interactive Brokers? Well, if the title, if you read the title, yes, it's probably going to put that in there. Yeah, I did buy Interactive Brokers stock. I purchased some IPKR in my non-taxable Roth IRA, and the way I separate that is if it's a dividend payer, I usually put it in the Roth IRA just because there's a tax advantage there versus the taxable account. I bought it at an average price of $154, so a little bit during that market downturn in early April.

I think this is a great management team, a competitively managed business. Check and check. Is the stock cheap? Over the next few years, it may not appear cheap if the market crashes, but honestly, who knows? Maybe we're going to keep going higher.

And I have no clue whether that will happen, and neither do you listening to this. But over the long term, if accounts keep growing, it is very cheap. $15 billion in operating income in 10 years is a sub five times earnings multiple compared to the current market cap. They deserve to trade at 20 to 25 times earnings, in my opinion, normalized earnings. You add in a lot of dividend payments over the next 10 years, you have a lot of capital

getting absorbed on the balance sheet that they can eventually pay off. And we have solid multibagger potential from today's levels. IBK is currently about 5% of my investing portfolio. And given the fact that I know almost, I wouldn't say with certainty, but if the market crashes, if there's recession, if there's a big wipeout, a multi-year downturn in the U.S. stock market, the IBK stock is probably going to crash as well, even if I still think it's cheap. but given the fact that they run a conservative balance sheet the focus on the long term and their long runway to keep growing i would embrace buying the dip on this one and i would i wouldn't this is one of those high quality businesses i would not be afraid to make a large

position like a large percentage of my portfolio as opposed to something like if we're going through my personal account, like a Portillo's or a Gogo, which I think has a lot of upside, but less of a quality business than something like this. I will sell. The reason I'm looking for is that I see an erosion in the culture. That's kind of a qualitative thing that I got to look at or stall account growth over a multi-year period. That's kind of a quantitative thing to show that I'm wrong. But besides that, I think that's it. I bought some shares i think what is a good price i'm willing to buy more if the stock keeps falling and i think this is a great business can you guess the returns since 2010 that was the ipo

no i believe the ipo was just before the gfc actually 2010 10,000%. Very close, 1,251%. I don't think it'll be the same over the next 10, but I think it can be 500, 600% of things keep going on this trajectory. Yeah, I think this is just a really underrated, high-quality business.

For something that seems so high-quality, it just never gets talked about. At least I don't think so. Maybe I'm just in an echo chamber of big tech or something, but it seems like really high quality, high switching costs, which is, like you said, kind of a double-edged sword because it's been a little harder to acquire customer accounts. But it almost reminds me a little bit of American Express in a way where they've kind of – IBKR Lite has allowed them to sort of revitalize the business and see quicker account growth. And they're seeing it – both businesses are seeing it particularly with younger customers. So I don't know. I kind of see some parallels there.

Yep, international push. My hot take is that this doesn't need to happen for the stock to work. but if we hit peak uh let's say magnificent seven exposure to the as a percentage of the market if we hit peak nasdaq 100 exposure if we hit peak u.s stock market as a percentage of global stock market wealth or however you want to define that and the u.s dollar gets devalued um maybe we even hit peak index funds as a percentage that would be kind of extreme i think that trend's going to keep growing until it can't and things start going haywire. But that's a whole nother topic. If that happens, though, I think that is a macro. All those are a macro tailwind

for IBKR in the United States because people are going to want to start investing internationally. Everyone chases what other stock markets are doing well. And I think that's maybe one of the reasons why they had a good Q1. Okay, I believe that is going to do it. thank you to everyone who listened to this episode thank you to everyone who maybe read this report on the chitchat stocks substack brett any other notes or anything else you want to mention before we sign off here i don't think so a lot of some other good stuff coming up on wednesdays from just a reminder follow us on substack that's where you get all the newsletters and you know get updated on every episode if you don't open your podcast player and then if you enjoyed this

episode or any other episodes, give us a quick five-star review on Spotify or Apple Podcasts or both, if you don't mind. Let's hit the disclosure. We are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan, I, or any podcast guests may hold securities discussed in this podcast, may have held them in the past, and may buy, sell, or hold them in the future. Thank you, everyone, once again, and we'll see you next time. We'll see you next time.