May 2, 2000 7:07am
THE DAY AHEAD: Web brokers'
profits can't buy Wall Street's love
By Larry DignanTDAIN ZDII
These are good times for online brokers, but
you'd never know it by looking at their stock
prices.
Online brokers such as E*Trade Group
(Nasdaq: EGRP), Ameritrade (Nasdaq:
AMTD), DLJdirect (NYSE: DIR) and Charles
Schwab (NYSE: SCH) all creamed Wall Street
estimates and delivered stellar quarterly
results.
Web broker stocks: Good time to buy?
Add your comments to the bottom of this
page.
E*Trade broke even in the first quarter when
First Call consensus estimates pegged the
company for a loss of 16 cents a share. The
brokerage showed that its hefty marketing
budget is worth the price.
For the quarter ended March 31, E*Trade?s net
revenue grew to $407 million, up 152 percent
from the same period a year ago. The online
broker also attracted 603,000 new accounts.
?We continue to look favorably upon the future
prospects for E*Trade,? says Bryan Keane, an
analyst at Prudential Volpe Technology Group.
?The company has entered continuing
operations profitability six quarters ahead of
schedule, flexing its blue-chip Internet business
model.?
What kind of response did E*Trade get for
those results and analyst comments? E*Trade
closed at $22 3/4 on April 12, the day of the
earnings report, and hit $18 two days later in
the tech downdraft. E*Trade closed Monday at
20 13/16.
Ameritrade ran into the same wall. On April 13,
Ameritrade did E*Trade one better and posted
a surprise first quarter profit of 2 cents a share
on revenue of $170.3 million. The company
also added 319,000 new accounts. Not too
shabby, but not enough to keep shares afloat.
Ameritrade meandered around $14 for a few
days before showing a slight rebound.
Ameritrade closed Monday at 16 5/16.
DLJdirect had the same problem - nice profit,
weak stock price. Why? The consensus on
Wall Street is that first-quarter volume and
profits won't last.
"Investors are concerned about the June
quarter," says William Wong, an analyst at
Josephthal & Co. "The Nasdaq sell-off
sparked concerns that trading volume will
drop. The activity last quarter is not
sustainable."
The volatile stretch of trading among tech
stocks also informed investors that stocks can
fall as quickly as they rise. That reality could
hurt trading volume, which drives revenue and
profits at the online brokers.
Meanwhile, margin trading has been pegged
as one of the reasons the Nasdaq was so
volatile in the first place. Typically, an investor
can borrow up to half the value of his or her
stocks. Once the purchase is complete, the
value of the stock minus the amount of the loan
must equal at least 25 percent of the market
value of the shares. When stocks tank, margin
calls happen. That means investors have to put
up extra cash or sell shares to meet broker
requirements.
Many investors were borrowing from online
brokers - at very lucrative rates - to trade. If
margin trading declines or is capped, brokers
may lose a good revenue stream.
E*Trade Chief Executive Christos M.
Cotsakos tried to assuage investors' fears in a
letter to account holders. "No one can deny it,
the market has recently moved sharply in both
directions," he wrote. "Especially in times like
these, it's important that all investors, myself
included, need to take a step back to think
about where we've been and where we're
going so we don't overreact."
Investors may not heed Cotsakos' advice, but
Wall Street analysts are following it.
"It's too early to tell what effect the volatility will
have on online brokers," says Wong. "These
companies have been adding so many
accounts. I'd rather have the accounts than the
transaction revenue."
Stock brokerages often act as banks for their
customers and look to make a sizable chunk of
their revenues managing the captive assets.
Wong says online brokers have been focused
on acquiring assets to lessen their
dependence on commission revenue. E*Trade
had $65 billion in customer assets at the end
of the second quarter and Ameritrade had
$38.9 billion.
"Acquiring customers is key right now," said
Wong. "The online brokers have probably
bottomed out, but exercise caution."
Neil |
