Key Points
Interactive Brokers was downgraded to neutral from buy.
The analyst calls the company "best-in-class" but thinks the stock has gotten ahead of itself.
Interactive Brokers' track record illustrates why it's worthy of a premium.
Shares of Interactive Brokers Group (NASDAQ: IBKR) slipped on Tuesday, falling as much as 6.3%. As of 2:18 p.m. ET, the stock was still down 6%.
The catalyst that drove the brokerage and trading platform lower was bearish commentary by one of Wall Street's finest.
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Fully baked?
UBS analyst Michael Brown downgraded Interactive Brokers to neutral (hold) from buy, though he increased his price target to $102, up from $50. That represents potential upside for investors of roughly 5% compared to Monday's closing price -- so he's clearly playing catch-up.
Brown appears to have mixed feelings about the stock. One the one hand, the analyst views Interactive Brokers as "a best-in-class broker with a compelling growth runway." He expects the company to generate low-teens earnings per share (EPS) growth over the coming five years, fueled by account and client asset growth and increased trading activity. The analyst also called the platform "highly efficient," which will allow Interactive Brokers to maintain its gross margin in the high 70% range.
The analyst also cited a suite of new products -- including cryptocurrency, prediction markets, and advanced tools -- which he believes will deepen both customer engagement and wallet share.
So what's not to like? Brown says the current stock price "already reflects much of that advantage."
The analyst has a point. As of market close yesterday, Interactive Brokers stock was trading for nearly 39 times earnings and 36 times forward earnings. While that's not particularly egregious, the valuation is a bit stretched for a company expected to grow earnings by low double digits.
On the other hand, Interactive Brokers' stock is up 47% over the past year, well ahead of the 18% gains of the S&P 500. In fact, the stock has far outpaced the broader market over the past three and five years -- which helps illustrate why Interactive Brokers is deserving of a premium.
Danny Vena, CPA 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 $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.