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Thursday July 20, 3:01 pm Eastern Time
Individual Investor
Internet: It's E*Trade's Time
Analyst: David Peltier (07/20/00)
With E*Trade Group (NASDAQ: EGRP - news) posting Street-beating quarterly results, the Internet brokerage firm is living up to its advertising slogan: ``It's time for E*Trade.''
The online broker reported fiscal third quarter (June) profits of $0.02 per share, versus Street expectations of a penny loss. The upside was mainly a result of the company stealing market share away from its smaller competitors in difficult market conditions.
Overall trading volume in the second quarter declined by more than 20% on a sequential basis, as the Nasdaq Composite posted its worst performance in a decade over the same period.
The stock took off at the open Wednesday, reaching a high of $19.75 per share, for a gain of $1.81. By the end of the day the general market decline vaporized E*Trade's move, and the shares closed at $17.75, down $0.19.
E*Trade customers made an average of 169,000 trades a day, representing a drop-off of 26% over the prior year. At the same time the company added 330,000 new accounts to end the quarter with 2.9 million active users.
But E*Trade still managed to grow revenue 77% to $330 million, easily outpacing some of its competitors, like DLJ Direct (NYSE: DIR - news). Gross margin improved an impressive 650 basis points to 62.3%.
This growth compares very favorably against the rest of the discount/online broker industry, and places E*Trade firmly in second place, behind Magic 25 component Charles Schwab (NYSE: SCH - news).
The company continues to grow its business at a faster pace than the much larger Schwab, but E*Trade's $61 billion asset base is no match for Schwab's $931 billion in customer deposits.
Even though Schwab is trying to move into E*Trade's space by acquiring the day-trading firm CyberCorp and lowering its commissions for active traders, we believe that there is more than enough room for these two companies, at least in the immediate future.
Reason: while Schwab is moving ``down the ladder'' to compete with the deep-discount brokers, E*Trade is at the same time rounding out its services to make itself more like Schwab -- a one-stop online financial stop. One day these two will probably have to compete directly against each other, but right now it looks like both will be able to enjoy prosperity in the immediate future.
But the future doesn't look so bright for every e-brokerage. Witness DLJ Direct's earnings report Wednesday morning, confirming that the second-tier firm is losing further ground to the major players in the online brokerage world.
Not only did the company badly miss estimates by $0.04 per share with its wider-than-expected loss of $0.06, but DLJ Direct only grew year-over-year revenues by about 40% when the top competition, Charles Schwab, is posting at least 50% improvement.
Even worse, the company saw operating expenses increase 51% for technology upgrades and advertising. While industry advertising budgets are slowly declining, DLJ Direct shelled out $689 for each new account in the second quarter -- about more than twice what Schwab and E*Trade have to spend.
Right now the only thing keeping Direct afloat is its strong presence in the rapidly growing Asian trading market. Even with deep-pocketed investment bank Donaldson Lufkin, and Jenrette (NYSE: DLJ - news) backing DLJ Direct, the company is in trouble, competitively speaking. And we believe it's only a matter of a few quarters before the company is absorbed back into its parent or snapped up in an industry-wide acquisition binge.
We feel that other lesser players such as TD Waterhouse Group (NYSE: TWE - news), Ameritrade Holding (NASDAQ: AMTD - news) and National Discount Brokers (NYSE: NDB - news) could be headed toward similar fates, unless they post breakout results in the coming weeks.
While the online brokerage sector is down, by no means are the leaders like E*Trade and Schwab out. Even though year-over-year volume growth is starting to normalize in the U.S., the revolution of discount retail investing is spreading globally.
Last year the big story was the growth in European trading, and this year the focus is moving to Asia. E*Trade has operations well-ensconced all over the world, and will continue to benefit as more global investors pony up to the equity markets.
And while the markets are generally experiencing a seasonal slowdown, we expect that trading volumes will once again pick up by early fall, and will continue to show robust year-over-year growth.
Bottom Line:
For months we have maintained that size matters in this industry, and E*Trade has proven it. We continue to like the stock in the teens, and believe that it can outperform the market for the remainder of the year.
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