E*TRADE:Why DBCC and MKTW need to establish a substantive alliance or Just In [Internet] Time Shareholder Value Maximization
E*TRADE: CAN THIS FINANCIAL SERVICES STEAMROLLER BE STOPPED?
"...Can we all say M-O-M-E-N-T-U-M? The past month of frenzied deal-making has awakened me to the fact that E*TRADE is no longer just a threat to online brokers such as Waterhouse, Charles Schwab and AmeriTrade.
E*TRADE doesn't want a healthy slice of the online brokerage pie, they want it all - and the bakery that baked it.
This aggressive strategy of building a one stop online financial services destination site places E*TRADE squarely in the path of the bread-and-butter business of off-line heavyweights such as Merrill Lynch and Goldman Sachs. Investors have bid E*TRADE up to a market cap of nearly $5 billion (approaching 1/5th the size of Merrill Lynch's cap) and traditional brokerage houses are running scared of this financial services maverick.
Notice I didn't write "online brokerage giant;" E*TRADE is already much more than a leading online broker.
E*TRADE's Tentacles Continue to Grow
Let's review the areas into which E*TRADE is now reaching their tentacles. On January 7th, E*TRADE purchased a 25% stake in Archipelago, one of the nation's largest ECN's for NASDAQ stocks. (ECN's allow purchase and sale transactions to be matched electronically outside the exchange trading system.) This move
allows E*TRADE to offer higher quality order routing and faster execution. In the long run, this investment will lower routing/execution costs for E*TRADE while satisfying day traders and active investors who play "online brokerage hop skotch" - shifting their accounts as they seek the online broker with the quickest transactions and crispest execution.
The New IPO Shop on the Block
This past Tuesday, E*TRADE announced plans to invest in E*OFFERING, an online full service investment bank, along with big financial names like Sandy Robertson (Robertson, Stephens & Co.) and Walter Cruttenden III (Cruttenden Roth). This move drives right at the heart of smaller boutique investment banks such as Hambrecht & Quist and Volpe, Brown, Whelan & Co. which specialize in tech IPO's. If these investment boutiques thought it was getting tougher to remain independent, they ain't seen nothing yet.
E*OFFERING is expected to lower the cost and increase the speed of the IPO process. E*OFFERING will charge less than the traditional 7% of gross funds typically generated by investment banks for IPOs. Already E*TRADE offers their customers regular access to a variety of IPOs, including some sizzling hot Internet IPO issues. E*OFFERING will allow E*TRADE customers still greater access to a variety of tech IPO's in the $25-$50 million range. Down the line, E*OFFERING also plans to begin underwriting private placements, convertible debt and straight debt.
It's pure genius on the part of E*TRADE, with their ravenous customer base of users eager to swallow up small tech IPOs.
Show me an individual investor who wouldn't appreciate a standing invitation to take a piece of some hot tech IPO that they have been reading about in The Wall St. Journal and hearing about on CNBC for the past month. In my opinion, E*OFFERING's involvement with E*TRADE will prove a unique and powerful customer acquisition tool for the company.
Does E*TRADE mind if new customers open accounts simply to gain access to one of E*OFFERING IPO's? Not at all. Once it has that account, E*TRADE can work on building a long-term relationship with that individual and can massage him or her into its larger financial services mix. This clever IPO marketing mechanism will have slashed the cost of customer acquisition.
Digesting a Little More of E-LOAN
On Wednesday, E*TRADE increased their stake in multi-lender Internet mortgage company E-LOAN by exercising some existing warrants. E*TRADE initially acquired a stake in E-LOAN last year when the company was named the exclusive multi-lender partner for E*TRADE for the next three years. E-LOAN allows users to shop for competitive prices and apply for a loan online. This increased
investment in E-LOAN is further evidence that E*TRADE's goal is to become the de facto online financial service behemoth.
It's an enticing Web of services they are building.
Want to trade online stocks and mutual funds? Open an account with E*TRADE. Want access to hot tech IPO's? E*TRADE has E*OFFERING. Need a home loan? Click on over to the E-LOAN center on E*TRADE. Need some credit? E*TRADE Visa offers
a low 9.9% fixed APR. Next up auto and life insurance? Through a partnership with Insweb, E*TRADE has got you covered.
Get the picture?
And E*TRADE has by no means added its last feature. The company announced an agreement with Barclays Global Fund Advisors that will enable E*TRADE to offer its own branded selection of index, enhanced index and fund-of-funds products to customers.
Is there a financial service that E*TRADE does not intend to offer? I doubt it.
The list goes on and on. E*TRADE is already attempting to integrate many of the various services online that has prompted large off-line mergers such as Travelers and Citibank.
E*TRADE is no longer one of the Web's leading online brokers, it is a
full-fledged financial services firm in the making.
E*TRADE's Innovative Marketing Programs
E*TRADE's rapid growth is being propelled by a $100 million marketing campaign unveiled last September. The campaign includes radio, TV, newspaper, magazine and Internet advertising. Already E*TRADE enjoys partnerships with high profile sites such as AOL, Yahoo! and ZDNet. But the potential reach of future marketing programs for E*TRADE doesn't end there.
Japanese conglomerate SOFTBANK's $400 million strategic investment in E*TRADE this past summer has opened the door to dozens of potential high profile partnerships with properties in SOFTBANK's Internet venture capital portfolio. It is worthwhile noting that current E*TRADE partners such as Yahoo!, Ziff-Davis, Insweb and E-LOAN are SOFTBANK-related portfolio companies.
No Signs of Slowing Down
This week, E*TRADE announced an exclusive marketing agreement with United Airlines to enable E*TRADE customers and United Airlines Mileage Plus members to earn up to 50,000 Mileage Plus miles per year. American Airlines customers will be able to earn frequent flyer miles by opening a new E*TRADE account and
by referring new customers to E*TRADE. Sounds like the kind of deal that frequent flyer fanatics will jump at. After all, if you haven't gotten around to opening an online brokerage account, why not do so when you will be rewarded in the process?
E*TRADE also struck a marketing deal with Comp USA this week wherein the retailer will issue a $100 gift certificate to customers who open an account with E*TRADE. Look for this promotion to show up as an insert in newspapers around the country this weekend. Once again, E*TRADE is banking on the concept of "incentivizing" customers to open an account. With a low $1,000 minimum
account balance, the offering is likely to be a hit. The game for E*TRADE is to rapidly increase its number of accounts. The company will figure out how to target a variety of financial services in it's new customers' direction later.
E*TRADE's Future
In the company's first fiscal quarter (ended December 31, 1998) E*TRADE added a whopping 132,000 active new accounts. This marks a 55% increase over last quarter's total. These new accounts brings E*TRADE's total customer base to around 676,000 - a 100%+ gain from the same period a year ago.
Revenue reached $88.1 million in that first quarter, a 28% increase over the previous. Compared to last year's revenue of $54 million for this same period, E*TRADE saw a rise of 63% year-to-year. Despite these gains, increased marketing costs forced E*TRADE to post a loss of $13.2 million (or $.23 cents a share) for the quarter. In my opinion, E*TRADE's lack of earnings is not important at this stage of the game. The company has shown the ability to post profits in the past, and rapidly acquiring new customers is priority #1 at this
juncture.
Off-line old line brokerages like Merrill, Goldman and Morgan Stanley won't be treading lightly on the 'Net for long. The second quarter of this year will likely mark the beginning of all-out Internet warfare among this group, once Merrill Lynch stops stumbling and puts their online brokerage plans in place. Online competitors like Schwab and Waterhouse will provide all the additional competition E*TRADE can handle. Regardless, E*TRADE is up to the challenge and stands a chance to close the millennium as the largest online broker.
Listen up, Charles Schwab; you're a great discount broker. But E*TRADE will top you. In the Internet driven New Economy, it's inevitable.
Pioneering discount brokers like Schwab will start to feel the pain later this year as maintaining legions of brokers and offices nationwide, while still juggling a prosperous online unit, becomes increasingly difficult.
Since Christmas, individual investors have fallen in love with E*TRADE's stock. Is E*TRADE's current market cap of $4.86 billion and its $86 share price justified?
Let's look at the nation's largest brokerage house/investment bank in
comparison.
Merrill Lynch, the US's largest security firm, currently sports a market cap of $25.6 billion. The company announced this past week that it now has a staggering $501 billion in assets under management.
E*TRADE currently has only $15.2 billion in assets under management. Is E*TRADE really worth nearly 1/5th the value of Merrill Lynch while managing only 1/33rd as much in assets?
With the Internet's staggering growth and E*TRADE's incredible momentum, it is honestly a tough question. Given the Street's current love affair with E*TRADE, we may just have our answer.
Can Merrill Lynch change the Street's mind? Don't bet on it..."
source: © January 15 1999 - Issue: 1.24 The Raging Bull's CyberStock Investor Report Editor: Matthew W. Ragas
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