Interactive Brokers Has Posted a Pre-Tax Margin Above 70% for 7 Straight Quarters. Why Rivals Struggle to Copy It

Interactive Brokers (NASDAQ: IBKR) keeps setting records in the financial asset trading space. The online brokerage catering to global traders posted a pre-tax profit margin of 77% in its latest quarterly earnings, marking seven straight quarters with a bottom-line margin above 70%.

This makes it one of the most profitable companies in the world in relation to profit margins, which is why it now has a market cap of $155 billion. Here's the magic behind these absurd margins, and whether it makes the stock a buy right now.

Automated brokerage for global traders

Stock trading is now almost entirely digital worldwide. For Interactive Brokers -- otherwise known as IBKR -- this has been a tailwind, as it is one of the best platforms for connecting global traders. Through decades of technology and regulatory investments, IBKR can connect investors who want to buy stocks, bonds, and foreign currencies in 170 markets worldwide.

When an individual or a hedge fund in the United States wants to buy stocks in Japan, the easiest way is to use IBKR. The same can be said for someone in Japan who wants to invest directly in the United States. This better customer value proposition has people switching over their trading to IBKR, with customer accounts up 34% to 5.19 million at the end of last quarter.

With only 3,000 employees globally, compared to sometimes 10 times that number at competing stock brokerages, IBKR has remained highly efficient in spending to scale profits quickly across its digital trading platform. This is why the business has enjoyed extreme operating leverage in recent years, hitting 77% last quarter. A ceiling of 100% limits how much more leverage IBKR can achieve in its operations, but its discipline on employee count should lead to even greater margin expansion in the years ahead if it can keep growing total customer accounts.

Image source: Getty Images.

The rub on IBKR's margin, and whether it is a buy today

One area where IBKR has seen a boost to its business in the last few years is net interest income. With the Federal Reserve raising interest rates, the company was able to charge customers more on margin loans and credit balances, as well as with idle cash on its balance sheet. Net interest income grew 23% to $1 billion last quarter, and is actually the largest revenue segment for the business.

This may reverse in a falling interest rate environment, which will affect IBKR's growth and pre-tax profit margin. However, it doesn't change the fact that IBKR is one of the most efficiently run growth businesses in the world.

But is the stock cheap? Today, IBKR trades at a price-to-earnings ratio (P/E) of 36, one of its highest levels in years, driven by a recent acceleration in customer account growth. I think the stock will likely do well over the long term. It is just hard to argue that IBKR is a screaming buy right now, due to this high P/E ratio.

Brett Schafer has positions in Interactive Brokers Group. The Motley Fool has positions in and recommends Interactive Brokers Group. The Motley Fool recommends the following options: long January 2027 $43.75 calls on Interactive Brokers Group and short January 2027 $46.25 calls on Interactive Brokers Group. The Motley Fool has a disclosure policy.