Analyst: David Peltier (3/24/00)
Wall Street has been buzzing of late that consolidation is ahead for the finance industry, and it's coming on fast.
There are rumors flying all over the place ? commercial banks are buying brokers, brokers are buying banks, old line brokers are buying online firms and online brokers are buying banks. Whatever the combination, it's been in the air lately.
This speculation doesn't surprise us that much, especially coming from the firms that do business over the Web.
What doesn't make sense to us, is that the top name on everyone's target list is E*Trade (NASDAQ: EGRP - Quotes, News, Boards). Certainly, anyone who buys in now will profit from a takeover premium. But in our view, the company is building a bright future for itself as an independent company, and is unlikely to look for an exit strategy just yet.
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E*Trade has one of the strongest brands on the Internet, which has been confirmed by numerous marketing surveys. The company's witty ? albeit expensive ? ad campaign has solidified the brand name and made the company the bellwether of the online brokerage segment, even before the likes of 'old-market' giants like Schwab (NYSE: SCH - Quotes, News, Boards).
E*Trade has done an amazing job of building its brand in the last 18 months, and is just settling down to take advantage of the weapons in its arsenal. The company has developed and executed its vision better than any other firm in this space.
Frankly, this firm is better off on its own, especially once you consider the track records of the larger investment banks and how poorly their Internet outfits have performed.
But consider the things working in E*Trade's favor: Trading volumes are going through the roof this quarter. That's good for every broker where commissions are a big part of revenue.
Plus, investors have poured back into brokerage stocks with a vengeance, and E*Trade itself is up almost 35% in the last month. Thursday it closed at $27.88. We still like the core online brokerage business, and think that the company will report account growth, volume and customer acquisition costs better than the industry averages. It is clearly dominating the industry by offering more services than its deeper discount competitors and a better price than the larger banks.
But there are more reasons why we're so bullish on E*Trade: Namely, we think the company has made some wonderful acquisitions recently, and it still has some strategic moves up its sleeve. There are too many chapters still to be written in this book before the company sells to a larger competitor. That means shareholders can ride this stock for a long time.
The latest example was last week's acquisition of privately held Card Capture Services, which manages a nationwide network of 8,500 automated teller machines. Now the company's more than 2 million brokerage and banking customers have access to cash with no additional transaction fee. This is a great move, especially while the company is still integrating its Telebanc purchase from last year.
The move is far more than just another deal in the breakneck online banking sector. Consider that for the most part, online banks have had to deal with the anachronistic practice of taking deposits through the US Postal Service.
What's so online about that?
Even pure-play Internet banks like NetB@nk (NASDAQ: NTBK - Quotes, News, Boards) lack the nationwide clicks-and-mortar presence E*Trade gained with this deal. NetB@nk also has ATMs available to its customers, but it doesn't actually own them, so its depositors are getting hit with fees every time they make a transaction.
The real future, though, lies in how E*Trade leverages the physical presence the ATMs give it. Why stop with just cash withdrawals, when ATM's are being used for so many other applications these days?
E*Trade is determined to grow into a financial services super-portal, and if it configures the ATMs as Internet access kiosks, it can do more than just dispense cash from them. Space can be leased out to advertisers who want to reach E*Trade's account holders.
E*Trade can even lease out time and space to other firms to that allow access to their content from these portals.
The most obvious next step is to install software that lets customers invest from any of these ATMs. As bullish as we are about the prospect of the wireless Web, it will likely take another five years until it is cheap and convenient for the masses, until then, a nationwide network of ATMs is a very practical, intermediate step.
The analysts and investors that don't think E*Trade can survive on its own just don't understand what it's like to do business over the Internet. These days the best organizations are formed through strategic alliances and partnerships.
For that reason, we predict that the next move E*Trade makes is to bolster its IPO subsidiary, E*Offering. The company announced Tuesday that it's retaining Proxicom (NASDAQ: PXCM - Quotes, News, Boards) to revamp E*Offering's presence on the Web.
If there's one thing that online investors want, it's better access to high-caliber initial public offerings. Plenty of companies had promised this access to individual investors through the various Web brokers, but they have just not been able to deliver.
Therefore we see E*Trade raising the bar once again for its competition, by entering into a venture with a top-tier bank like Goldman Sachs (NYSE: GS - Quotes, News, Boards). We single out Goldman because of its top investment banking capabilities, but it lacks a viable retail Internet strategy. At any rate, we could see E*Trade partnering with any top bank.
Bottom Line:
While we don't envision E*Trade as a takeover target, and any commission trading revenue is subject to a market slump, we still think the stock has amazing potential over the next year and should be considered for purchase at Thursday's closing price of $27.88. |
