Why Interactive Brokers Stock Popped on Friday

Key Points

• Interactive Brokers stock beat on the top and bottom lines on Thursday evening.

• The company grew its customer count 32%, but its earnings only 24%.

• Interactive Brokers outperformed expectations this time, but long-term growth looks too slow to justify a premium valuation.

• 10 stocks we like better than Interactive Brokers Group ›

Online stockbroker Interactive Brokers Group (NASDAQ: IBKR) soared to close up 7.65% on Friday after beating on both the top and bottom lines Thursday evening.

Heading into the quarter, analysts forecast Interactive Brokers would earn $0.45 per share (adjusted for one-time items) on sales of just under $1.4 billion. In fact, the company earned $0.51 per share -- generally accepted accounting principles (GAAP) -- and its sales were just under $1.5 billion.

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Interactive Brokers Q2 earnings

Not only did Interactive Brokers report GAAP earnings superior to the mere "adjusted" earnings number Wall Street was looking for, but its earnings actually grew 24% in comparison to last year's Q2. Revenue growth for the quarter was only 20%, so profit margins on revenue improved as well.

Interestingly, new customer accounts grew only 32% during the quarter, however, so much of the company's increase in revenue (and profit) must have come from existing customers, with new customers just dipping their toes in the water initially. Indeed, DARTs (daily average revenue trades) for the company grew 49%, suggesting that long-term customers of the company traded even more frequently in the quarter.

Is Interactive Brokers stock a buy?

Management did not give guidance for the coming quarter or for the full year. For what it's worth, though, analysts who follow the stock forecast Q3 earnings very similar to Q2 -- $0.46 per share, unless IB surprises them again. Revenue growth is supposed to be similarly modest, up only 3% year over year.

Granted, longer term, analysts see the company growing earnings at a faster rate -- 12.5% annually over the next five years. Still, that doesn't seem fast enough to justify the stock's premium valuation of nearly 33x trailing earnings.

At that high price, I just can't bring myself to recommend the stock, earnings beat or no earnings beat.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Interactive Brokers Group. The Motley Fool recommends the following options: long January 2027 $175 calls on Interactive Brokers Group and short January 2027 $185 calls on Interactive Brokers Group. The Motley Fool has a disclosure policy.