Artificial intelligence (AI) stocks have been the center of attention for the past year, and for good reason. Nvidia, for example, has delivered a whopping return of more than 160% during the past 12 months alone on the back of soaring demand for its AI data center chips.
But investors shouldn't forget about the rest of the market, because there are plenty of opportunities beyond AI. Interactive Brokers(NASDAQ: IBKR) is one of the world's largest online financial brokerages, and its business is benefiting from both higher stock prices and higher interest rates.
Interactive Brokers stock is up almost 50% this year, but it's still cheap based on one traditional valuation metric. Here's why it's a buy now.
Image source: Getty Images.
Growth across the board
Rising stock prices entice investors to come off the sidelines and put money to work, and the S&P 500 index is in the midst of a raging bull market right now. Interactive had 2.92 million client accounts at the end of the second quarter of 2024, which was up a whopping 28% from the year-ago period. That marked an acceleration from its first-quarter growth of 25%, so market participation is clearly ramping up.
Interactive also saw client equity soar 36% year over year during Q2, to a record high of $497.2 billion. That was partly attributable to rising stock prices, which organically boosted the value of customer account balances. Higher client equity can translate into more fee income for Interactive because it earns commissions based on transaction values.
But there was an even bigger sign of client bullishness during Q2, because margin loans rose 32%, topping $55 billion. That growth was also an acceleration from Q1's 30%. In other words, clients are borrowing more money to buy stocks and other financial assets, which they typically only do when they have a high degree of confidence in the market.
Interactive saw a 26% jump in stock trading volume in Q2, and a 36% rise in options trading volume. Since options are often used to make riskier bets, it's yet another sign of bullish sentiment.
Revenue and earnings continue to climb
Interactive generated $1.23 billion in revenue during Q2, which was up 23% from the year-ago period. That included 26% growth in commission revenue on the back of the higher trading volumes I just mentioned. It also included a 14% jump in net interest income, which made up the bulk (64%) of Interactive's total revenue.
Interactive has seen a rapid rise in its interest income since the U.S. Federal Reserve started hiking interest rates in 2022. The company earns interest on its own cash holdings of $3.9 billion, but also on the $31.7 billion in cash it's holding on behalf of its customers, which it stores in banks. Plus, Interactive earns interest on margin loans.
However, investors and analysts expect the Fed to cut interest rates three times before the end of this year, so Interactive could lose some of that tailwind. Therefore, it's really good news that commission revenue grew so quickly during Q2, because that directly comes from actual business operations and it will be necessary to drive the company's overall expansion in the long run.
Interactive Brokers stock is still cheap
Interactive generated $6.31 in earnings per share during the past four quarters, and based on its recent stock price of about $122.70, it trades at a price-to-earnings (P/E) ratio of 19.5. That's about a 20% discount to the 24.4 P/E of the S&P 500 index.
That means despite its gains this year, Interactive stock is still cheaper (on average) than the rest of the market. As long as the bull run continues, the company should see further growth in its client accounts, client equity, and commission revenue. Therefore, investors who are looking for some value outside of AI should consider adding Interactive shares to their portfolios.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Interactive Brokers Group. The Motley Fool has a disclosure policy.
