Wednesday, July 15, 1998
Selling information to the investor
A new campaign from E*Trade suggests that for online investors, it's not price alone that matters.
Michael Brush
moneydaily.com
Remember that ubiquitous ad campaign from Ameritrade (NASDAQ: AMTD) a few months back?
Well, brace yourself. Another campaign is on the way, this time trumpeting E*Trade (NASDAQ: EGRP), an Ameritrade rival.
And at stake this time may be more than the growth of E*Trade accounts. Analysts say the campaign for the new "Destination E*Trade" service will also provide a chance to see whether online investors care more about cheap trades or the content to help them make decisions.
"E*Trade's marketing was dormant while Ameritrade spent a lot of money asking people if price mattered," says Keith Benjamin, an analyst with BancAmerica Robertson Stephens, which will provide equity research for the site. "The conclusion was that price did not matter, because they did not generate a lot of accounts." Although Ameritrade spent more than twice as much on advertising, Benjamin says, it did not bring in that many more accounts than E*Trade.
Flush with cash because of a recent deal with Softbank, the largest software distributor in Japan, E*Trade will pick up its own efforts to tout its proprietary content. "We think that will be more compelling than just price," Benjamin says. E*Trade will spend about $9.8 million and $11.5 million on marketing in the third and fourth quarters, he says.
The campaign will be part of E*Trade's stab at making itself the financial portal of choice for online investors. "It is trying to be your financial dashboard," says Benjamin. "There really is no definitive brand yet in this arena for the average investor who wants to go online and find out everything they want to know about stocks and mutual funds. The closest thing might be My Yahoo! or America Online (NYSE: AOL)."
One of the products that may set Destination E*Trade apart is equity research from Robertson Stephens, which specializes in growth oriented stocks in fields like retail and technology. This joint venture stands out because many brokerages have been reluctant to offer their research online, for fear it would cannibalize the rest of their retail brokerage business.
There will also be chat rooms with analysts from Robertson Stephens, says Phil Leigh, an analyst with Raymond James & Associates. Some investors will get access to shares in initial public offerings. Destination E*Trade will also offer upgraded technology, a change many E*Trade users say has been sorely needed, even though E*Trade has denied there are any problems with its system.
What does all this mean for E*Trade's stock price? First, don't be put off by the fact that analysts have been cutting estimates recently. They say they are doing so to account for the fact that E*Trade will be focusing more on brand marketing in the near term than on earnings. Aside from Destination E*Trade, analysts cite the following positive factors.
* E*Trade has a war chest. The $400 million injection from Softbank -- in exchange for a 27% stake -- helps set E*Trade off from most of its competitors, when it comes to rescues, says Leigh. The deal brings E*Trade's cash position up to about $600 million.
* Softbank knows how to pick Internet winners. Leigh points out that Softbank has already teamed up with companies Yahoo! (NASDAQ: YHOO), Geocities, and Ziff Davis (NYSE: ZD), which have been successful in staking out territory on the Net. Softbank also runs the Comdex computer show, known as "Woodstock for geeks."
* E*Trade seems undervalued. Leigh notes that E*Trade has a price to book value ratio of about 3, whereas the average for the group is around 3.8.
* Other revenue sources may develop. Benjamin expects additional upside revenue from international licensing fees, joint ventures and subscriber fees for some products being offered by E*Trade.
The key factor, of course, will be the response to the ad campaign. Benjamin expects to see some account growth by September or October. At that point, he says, the stock will start moving up, as investors conclude there will be follow through. If he is right, that would make the pullback in E*Trade shares this week a good buying opportunity.
The next step will be to wait until the end of the year and see whether the campaign actually builds brand momentum and makes E*Trade a financial portal -- not exactly an easy task in the competitive world of on-line trading.
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