Good morning, E-Groupies. A bone for ye faithful...H&Q reiterated a buy on your stock. Okay, keep up the pump so my April 30's come into money...not much of a price target, however...$40 is still almost half of the all time high...however, should be good for a $1+ pop at the open...whether EGRP can hold on is another story...
February 28, 2000 - 6:45am
Hambrecht & Quist
Company: E*TRADE Group
Price: 22.25
Recommendation: Buy - Focus List
Notes: a, b
Date: 2/28/00
E*Fuego! Explosive Quarter Building, Raising Estimates
* We believe E*Trade is having one of its best quarters ever. Based on surging account growth, blistering trading volumes, and improving gross margins, we are raising estimates.
* F2Q00 revenues increase $70 million to $326 million, EPS moves from ($0.21) to ($0.18). F2000 revenues increase $115 million to $1,220 million, EPS moves from ($0.56) to (0.51). F2001 revenues increase $113 million to $1,640 million, EPS remains at $0.23.
* E*Trade is benefiting from a strong market environment, but the company's marketing success continues to excel.
* E*Trade is becoming a formidable distribution platform with over 2 million customer accounts.
* We continue to believe the stock price has become disconnected from the underlying fundamentals, creating an excellent buying opportunity.
* Reiterating our Buy rating and $40 target price.
*
1999 A 2000 A 2001 E
Q1 EPS $(0.04) $(0.14)A $(0.04)
Q2 EPS 0.03 (0.18) 0.01
Q3 EPS (0.08) (0.13) 0.09
Q4 EPS (0.09) (0.06) 0.17
FY EPS (0.18) (0.51) 0.23
FY REVS (M) 677 1,220 1,640
CY EPS (0.28) (0.41) 0.49
CY P/E NM NM 45
FY Ends Sep
Current Price $22.25
52-Week Range $6-72
Market Cap (M) $6,297
Shares Out (M) 283.0
Book Value NA
Net Cash/Share NA
3-Year EPS Growth NM
CY01 P/E-to-Growth NM
What More Can you ask for? We believe E*Trade is in the midst of one of its best quarters ever. By all indications, account growth and trading volumes are at record levels. Clearly the market environment has aided the company's success, but E*Trade's marketing team deserves credit for continuing to strengthen the brand during a period of heightened competition. We believe the company's SuperBowl ads were a raging success with the results showing in record account growth.
We are revising our net new account growth estimate during the quarter from 280,000 accounts to an astounding 380,000 accounts. Note, these numbers include both E*Trade and Telebank. This growth reverberates throughout our model so we are also raising our revenue estimates for the remainder of fiscal 2000 and 2001. Our adjustments for F2Q00 are summarized below.
Estimate Revision Details
Source: H&Q research
E*Trade's Revenue Growth(000s)
Source: Company reports, H&Q research
Along with the surge in revenues, we are increasing our gross margin estimate for the quarter to 54% (up from 48%), due to the leverage in E*Trade's model. We are also increasing our selling and marketing estimate from $120 million to $150 million. This increase is a direct result of the company's better than expected account growth. Due to E*Trade's many promotions, there is a high level of variability in the company's marketing expenses. If the promotions are more successful than initially budgeted, then expenses will grow accordingly. We estimate that E*Trade's average customer acquisition cost will be just over $300 for the quarter, compared to $280 last quarter (including Telebank). However, if the company adds 30,000 more accounts than we predict, then acquisition costs would remain at the same level as last quarter. This would be a major achievement given the competitive environment.
We believe E*Trade's brand has reached a new plateau. As best as we can tell, the company's quirky SuperBowl ads were a major hit. Additionally, the recent web site hacker attacks thrust E*Trade's brand side-by-side with the best brands of the Internet. E*Trade has become synonymous with online trading. We believe this new success will become visible when the company reports its fiscal second quarter results.
As shown below, E*Trade has consistently gained market share relative to its competitors. We expect the same trend to be evident during F2Q00.
E*Trade's Market Share of Online Equity Trades
Source: H&Q research
Growing Distribution Clout. By the end of the quarter, we estimate that E*Trade will have nearly 2.4 million customer accounts. E*Trade is becoming a formidable distribution platform. An example of this growing distribution clout is the company's recent agreement with PayMyBills.com, an online bill payment company. Through the agreement, PayMyBills.com will become the exclusive bill management provider to E*Trade's customer base. Along with the agreement, E*Trade made an investment in PayMyBills.com. Clearly E*Trade can dramatically influence the success of PayMyBills.com since E*Trade's customer base represents the ideal demographic for online bill payment. E*Trade's customers are already comfortable with using the Internet to manage their finances. We expect E*Trade to benefit from similar deals in the future as company's fight to access E*Trade's savvy and growing customer base.
E*Trade's Growing Distribution Platform (excludes Telebank)
Source: Company reports
Volumes Remain Vigorous. Market trading volumes continue to hit record levels. As seen below, our Index of Online Trading Strength has navigated uncharted waters throughout the quarter. We estimate that online trading volumes will increase between 30% and 40% sequentially during the calendar first quarter, on top of 56% growth during the fourth quarter.
Index of Online Trading Strength
Source: H&Q research
Further, Nasdaq volume is on pace to better the fourth quarter's 32% sequential rise. NYSE volumes are also up sharply, despite the 14% year-to- date decline of the Dow Jones Industrial average.
Nasdaq and NYSE Trading Volume Analysis
Source: Nasdaq, NYSE, Reuters, Bloomberg
Profitability is Coming, Be Patient. While some investors may be turned off by E*Trade's losses, we advise patience. We expect E*Trade to turn EPS positive again during F2Q01 and show strong earnings growth in the quarters beyond. If the market environment stays anything close to the current environment, then profitability could come even sooner. However, as long as E*Trade can continue to grow its account base with customer acquisition costs below $400, we believe the company should continue to spend aggressively.
EPS History and Estimates
Source: Company reports, H&Q research
Disconnected from Fundamentals. Despite E*Trade's strengthening fundamentals, the stock remains in the doldrums. We believe investors are avoiding the online brokerage sector due to the high level of competition and the losses created through heavy marketing. However, we believe E*Trade's results for the current quarter will be too good to ignore. Investors are not yet appreciating the company's position as a leading financial services firm. This all spells buying opportunity to us - we are reiterating our BUY rating and our $40 target price.
EGRP Versus our Index of Online Trading Strength (10 period moving averages)
Source:
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