Interactive Brokers, L.L.C.

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Interactive Brokers, L.L.C.

• Group 4
• Michael Mount, Brad Boeshaar, Brandon Buchanan

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Investment Thesis

• Lower operating costs allow IB to charge the
  lowest price.
• IB serves smaller clients in highly profitable
  prime brokerage.
• Market transfer from floor-based trading to
  electronic trading.
• Profit margin is far above industry average.

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Company Description

• This is a pure play brokerage.
• Interactive Brokers and affiliates trade 18.7 of
  worldwide options trading.
• Smart Routing automatically searches for the best
  exchange for a trade and routes around computer
  outages.

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Risks

• Competitors are able to copy Interactives
  trading technology.
• Computer system failure.
• Decreases in trade volume.
• Increases in regulation compliance cost.

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Artificially Low Demand

• Unknown company
• Dutch Auction IPO Process
• Wall Street does not like it, therefore dismisses
  it
• IPO is launching in the middle of earnings season
• Investor attention is elsewhere
• Currently small target market
• Prime Brokerage Services will lead to larger
  clients

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Prime Brokers

• Prime Brokers are brokerage accounts set up for
  hedge funds. They are even more profitable than
  retail brokerage accounts.
• Large companies who generally deal in this market
  do not work with accounts less than 60-80
  million.
• IB services hedge funds as small as 20 million.

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IBs technological advantages, especially from
smart routing, allow them to sustain extremely
large profit margins.
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Interactive Brokers is a price leader and yet
they still have a profit margin of 58.
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Interactives low price for options trading
allows them to capture 18.7 of the world option
market.
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Not only is the daily trading volume increasing,
but the percentage of trading done electronically
is increasing as well. This may be an indication
that floor trading will eventually become
non-existent.
Reference Chicago Board of Trade
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Valuation
P/E 1.1 gt P/E 1.1 gt P/E 40.81 gt P/EEPS
Stock Price gt 40.811.22 49.02 g
37.1

DCF Intrinsic Price per Share 32.80
assuming WACC 12 Terminal Growth 3
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Conclusion

• Buy if the price is less than 30.
• Profit margins far exceed industry averages.
• Artificially low demand for stock.
• Competitors cannot match their prices.
• Technological advantage with smart routing system