Banking: NextCard Faces Growth Questions as Rivals' Online Efforts Take
Off
By Peter Eavis
Senior Writer
2/21/00 1:30 PM ET
NextCard (NXCD:Nasdaq), the online credit card lender and flagship
e-finance company, is taking some big swipes.
Despite showing robust customer growth and narrower-than-expected
losses, some observers are starting to criticize the San Francisco
company's growth model. They say the Internet efforts of established
credit card companies -- particularly Providian (PVN:NYSE) -- are
starting to show growth that is outpacing that of NextCard. Skeptics
also point out that rivals are spending less to acquire online
customers than NextCard, even though NextCard is richly valued by
comparison. In addition, there are worries about the firm's push to
gain customers with riskier credit profiles.
Meanwhile, NextCard may have sparked some mistrust in the market after
it announced an important stock-boosting deal with online merchant
Amazon.com (AMZN:Nasdaq) on the day its IPO lockup period ended. When
lockup periods end, company employees are allowed to sell shares, and
if enough do, stock prices can sag.
NextCard says it's unconcerned by its rivals' Internet operations. It
also rejects concerns about its intention to acquire more subprime
customers and denies that it timed the announcement of the Amazon deal
to coincide with the end of the lockup.
Gaudy Numbers
Set up in 1996, NextCard is a credit card lender that uses the Internet
to attract customers. Its Web-only strategy has generated gaudy account
growth: The firm had 220,000 accounts at the end of 1999, up 300% from
55,000 at the end of the first quarter. Additionally, after posting a
narrower-than-expected loss in the fourth quarter, the company in
January brought forward the point at which it thinks it will make a
profit, to the first quarter of 2002 from the last quarter of that
year.
Judging by its valuation, investors still believe in NextCard. The
company trades at around 17 times projected 2000 revenue, vs. 12 times
for e-finance companies in general, according to Dain Rauscher Wessels.
Meanwhile, the average credit card company is trading at around 16
times earnings.
But NextCard's achievements don't look so impressive next to
competitors'. The company's accounts grew by 165,000 from end-March to
end-December 1999. But from end-May 1999 to mid-February this year -- a
slightly shorter period -- Providian signed up 220,000 new credit card
accounts over its Internet channel. "Providian only started doing
credit cards over the Internet nine months ago, and it's already doing
better than NextCard," says the manager of a financial-services hedge
fund who requested anonymity, and is short NextCard shares and has no
position in Providian.
Coupon Clipping
What's more, other companies are managing to expand more cheaply than
NextCard, says Meredith Whitney, credit card analyst at First Union
Securities, which rates NextCard a hold and has done investment banking
for the company. NextCard says its per-customer acquisition cost
(marketing expenses divided by net new customers) was $80 to $90 in the
fourth quarter. CompuCredit (CCRT:Nasdaq), a credit card company, says
it currently has an online customer acquisition cost of $37, while
Whitney calculates that Providian's is around $60. (First Union rates
Providian and CompuCredit a strong buy and has done investment banking
for the latter, but not the former.)
Greg Pacheco, a senior manager in Providian's online operations,
declined to confirm this number but said that NextCard's costs "are
quite a bit higher than our marketing costs."
NextCard's marketing chief, Dan Springer, concedes that acquisition
costs at his firm may be higher, but he expects them to come down in
the first quarter of this year. He adds that NextCard is attracting
higher-quality, more profitable customers than its rivals, including
Providian. This, he says, can be seen in the fact that NextCard
customers have an average balance of $2,000. The higher the balance,
the more fees the card company receives.
"I can't believe that anyone at Providian wouldn't trade our portfolio
for theirs," Springer says. Providian declined to say what its average
balance is for online customers.
Reserving Judgment
Whitney believes that NextCard's chase after more subprime customers
could hurt profitability, since it could force the company to keep
higher bad-loan reserves, which have to be subtracted from earnings in
the income statement. And she points out that annualized fourth-quarter
charge-offs were 4.92% of second-quarter average loans, a rate she
calls "somewhat high" for young lenders such as NextCard. (She uses a
two-quarter lag to account for the fact that loans don't go bad
immediately.)
Moreover, Whitney argues that the company will be forced to increase
its approval rate and take on more subprime customers in order to meet
the expectations of high-profile partners such as Amazon.com and
priceline.com (PCLN:Nasdaq), which let NextCard market from their
sites.
But "it's just not true" that the partnerships will force NextCard to
make a foray into subprime, says Springer. He argues that NextCard has
sophisticated credit-quality analysis that allows it to spot borrowers
whose credit quality is actually a lot higher than it might appear.
Jeff Runnfeldt, e-finance analyst at Dain Rauscher, says NextCard has
something big over rivals: A facility that allows customers to bid for
the best rates and conditions. (Runnfeldt rates NextCard a buy and Dain
Rauscher hasn't done any underwriting for the company.) But Pacheco
responds: "We are going to have something like that very soon."
Bagels and Lockups
The viability of NextCard's model will become apparent over time. But,
according to the hedge fund manager, the perception of NextCard's
management didn't improve when it announced the Amazon.com partnership
on Nov. 10, 1999, the day of the lockup expiration. It looked as if the
company was putting out positive news to offset any downward pressure
on its stock price that could have resulted from possible insider
selling. In fact, NextCard stock soared a massive 30% on Nov. 10, a
Wednesday, then dropped 14% to 35 7/16 by the following Friday.
Springer explains that the Amazon deal was inked on that Monday, but
wasn't released publicly until Wednesday because NextCard didn't want
its news to get drowned out by Amazon.com's announcement Tuesday that
it was starting sites dedicated to home improvement, software, video
games and gift ideas.
"Forty-eight hours is clearly not sitting on a press release," says
Springer.
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