Shares of global investment broker Interactive Brokers Inc. (IBKR, Financial) are up more than 28% this year and 122% since bottoming on March 23, 2020. The company's performance this year follows an impressive performance in 2020 amid increased trading activity.
The rally has pushed the valuation of the stock to a price-earnings ratio of 32.28, which is considerably high based on the Peter Lynch fair value.
Its stock also appears relatively expensive when compared with Virtu Financial Inc.'s (VIRT, Financial) price-earnings ratio of 5.74. On the other hand, Charles Schwab Corp. (SCHW, Financial) trades at an equivalent of 31.28.
Interactive Broker's forward price-earnings ratio of about 28.33 also trails Charles Schwab's 22.13 and Virtu Financial's 11.06. The stock still looks more expensive even after factoring in expected earnings growth for the next five years, with a PEG ratio of 4.83 compared to Charles Schwab's equivalent of 3.37.
Are investors overvaluing the stock?
Based on the valuation multiples, it looks like investors are willing to pay a higher premium for shares of Interactive Brokers than they are for its close rivals. One of the reasons for this may be its ability to generate cash.
Interactive Brokers trades at a price-free cash flow ratio of 4.23, which is several times better than Charles Schwab's equivalent of 23.66. Virtu, on the other hand, trades at an equivalent of 6.
This gives the company the flexibility it may require to adjust to changes in the business environment. It also makes it easy to capitalize on more opportunities to improve its product offering.
However, there is not much to look forward to beyond an impressive cash balance. Interactive Brokers pays dividends at a current yield of just 0.51%. This is easily dwarfed by Charles Schwab's equivalent of 1.09% and Virtu's impressive dividend yield of 3.24%.
Like Virtu, Interactive Brokers offers a variety of products to clients, including options trading, futures trading, commodities, stocks and foreign exchange. It is also one of the few publicly listed brokerage platforms that offer its products globally. Interactive Brokers introduced a simulated sports betting feature that allows traders to win commission credits in 2019. This is akin to most of its privately held global competitors.
In general, its product offering puts it in direct competition with several other online brokerage platforms, like the renowned social trading platform eToro. But unlike Interactive Brokers, some of the platforms are highly flexible in what they can do, which means they have a competitive advantage in the global scene.
Nonetheless, the company's international exposure could also be a strength because more cautious investors would be asking is eToro safe compared to a publicly listed broker? As such, if Interactive Brokers can improve its features and product offering to match or beat those of its global competitors, then this could see it rapidly grow its addressable market.
But for now, the stock looks relatively overvalued compared to its publicly listed peers. Its long-term growth potential could be what investors are betting on due to its global exposure.
Disclosure: No positions in the stocks mentioned.
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