Copied from Barron's Regarding E Trade:
Among the most adored objects in this bull market have been shares of
Internet ventures and brokerage firms, which happen to be the twin identities
of E*Trade Group. One of the hottest initial offerings of 1996, E*Trade is a
discount broker that deals exclusively online. The Palo Alto, Calif., upstart
has ridden the searing growth in keyboard investing to register rampant profit
gains, and even faster inflation of its market value. In the nine months ended
June 30, E*Trade's revenues were up 174% over the prior year, to $94
million, swinging a $1.3 million loss to a profit of $8.4 million -- even after a
$4.3 million pre-tax charge related to a state registration foul-up. This
impressive growth hasn't gone unnoticed by investors. The company's stock,
priced at $10.50 in its August 1996 IPO, hit a new high last week of $31,
driving its market capitalization to $1.06 billion from $298 million. Its
price/earnings ratio is a blinding 118 times trailing 12-month results, 83 times
forecast fiscal 1997 profits and a still-stout 56 times fiscal 1998 predictions.
These numbers give E*Trade a profile more like a cult Internet-software
outfit than a young electronics-commerce firm in a deeply cyclical industry
with steep competition, predatory pricing and dauntingly rich competitors
such as Charles Schwab and Donaldson Lufkin & Jenrette.
Perhaps recognizing there's a sellers" market in E*Trade stock, insiders have
filed to unload two million shares, while the company will issue another five
million shares in the same offering. The insiders include Chairman William
Porter, who is selling 100,000 shares, and venture-capital firm General
Atlantic Partners, which is disposing of 1.4 million.
E*Trade's towering valuation hasn't suffered from the announcement of the
impending offering, as investors and Wall Street analysts continue to gush
enthusiastically over its galloping growth rate. One reason: The people
covering E*Trade are generally technology analysts more accustomed to
stratospheric P/E ratios, who can hardly believe there is an Internet play that
actually makes good money. So, the stock has the highest average investment
rating in the brokerage industry and the company's roster of institutional
shareholders reads like the guest list for a momentum investors banquet.
A look at the valuations of companies plying the same Internet-investing
waters suggests, at the least, that E*Trade's stock has gotten ahead of itself.
Charles Schwab, the bellwether of discount brokers with a major online effort
itself, is at 33 times trailing earnings.
More to the point, there's AmeriTrade Holding Corp., an IPO from early this
year, which receives nearly half of its trades via Internet or by automated
touch-tone phone, a proportion that's growing. At 15 3/8, the Omaha
company -- parent of AccuTrade, Ceres Securities and K. Aufhauser -- is
trading at 20 times trailing earnings, 16 times fiscal "97 forecasts and 12.5
times expected 1998 net. Certainly a cheaper way to play the fastest-growing
part of the discount business, which itself is the fastest-growing part of retail
financial services.
AmeriTrade's rate of account growth trails somewhat behind that of E*Trade,
but its profit margins are substantially higher. E*Trade, exalted for its
marketing expertise, has certainly sold itself well to Wall Street, attracting the
complimentary coverage of seven analysts with high-tech growth-stock firms
(four of them are underwriting the offering). AmeriTrade's two IPO managers
-- Credit Suisse First Boston and Raymond James -- remain its only
followers from major firms.
Dick Bove of Raymond James notes that while E*Trade -- rated a "buy" at
his own firm by a tech analyst -- has "a tech multiple" and AmeriTrade is
valued more soberly as a securities firm, "at some point the multiples will
come together. One might argue that the multiple on one will come down as
the other goes up." He concedes that E*Trade might remain at a premium --
just not one as big as 400%. |
