May 27, 1999 Internet: Why DLJ Direct is the Horse to Ride in the Online Broker Field
Analyst: Chris Bulkey
On Wednesday morning, Investment banking
firm Donaldson, Lufkin, & Jenrette (NYSE:DLJ
- news) sold to the public 16% of its online
trading subsidiary DLJ Direct (NYSE:DIR - news) in one of the year's most highly anticipated IPOs.
The 16 million-share offering was priced at $20 per share, and had risen to $26 by early afternoon. Recently, a lot of momentum has come out of the Internet sector, which helps explain why the shares are getting a tepid reception today.
Despite the current weakness in net stocks, now may be a good time to snatch up shares of the nation's second largest discount broker. That's because the online brokerage business has been and will be one of the most compelling niches of e-commerce.
The growth in online trading has been impressive. According to International
Data Corporation (IDC), the total number of online brokerage accounts has grown from virtually nil at the end of 1994 to 1.6 million at the end of 1996 and 3.7 million at the end of 1997. IDC estimates that were more than 6.4 million online accounts at the end of 1998 representing $324 billion in assets and over 300,000 trades per day.
Favorable Valuations
Compared to the valuations of industry powerhouses E*Trade Group
(NASDAQ:EGRP - news) and Ameritrade (NASDAQ:AMTD - news) , DLJ's
current share price looks quite attractive. On a price to sales basis, E*Trade and Ameritrade carry stratospheric valuations, trading at 28 and 21 times sales respectively.
DLJ Direct had total sales of $117.9 million in 1998. By applying the
average of E*Trade and Ameritrade's ratios we arrive at a projected market cap of $2.9 billion for DLJ Direct. With a projected 100 million shares outstanding a comparative valuation would be $28.90 per share, indicating that the shares are currently at an 11% discount.
But DLJ Direct's growth prospects look relatively more attractive when you consider customer satisfaction. Gomez Advisors ranks DLJ Direct as the #1 online broker using a scorecard approach for several different quality categories. Further down the list is E*Trade at #3 and Ameritrade at #15.
Gomez Advisors analyst Dan Burke notes that DLJ Direct caters to the
'serious investor' or those that are 'data hungry.' This refers to the breadth of services and research functions offered on DLJ Direct's site, which is superior to both E*Trade and Ameritrade.
The serious investor is also willing to pay a bit more for the quality. DLJ Direct charges $20 per trade (market or limit order), while E*Trade charges $14.95-$19.95 (market order vs. limit) and Ameritrade charges $8-$13.
At the end of the March quarter, E*Trade had 909,000 total accounts, DLJ Direct had 590,000, while Ameritrade had 428,000. In terms of total customer assets E*Trade again leads the way with $21.1 billion, versus $19.5 billion for Ameritrade and $11.2 billion for DLJ Direct.
In 1998, DLJ Direct spent $25.1 million on advertising, which the company expects to increase to $65 million in its first year as a public company. For comparison sake, E*Trade and Ameritrade spent $71.3 and $43.6 million respectively in 1998. But Wednesday's IPO gives DLJ Direct plenty of financial flexibility to grow its market share. After the IPO, DLJ Direct will have $319 million in cash (assuming exercise of over-allotment) and no debt.
That heavier advertising at E*Trade and Ameritrade has certainly paid off. E*Trade generated $126.7 million in revenue, while netting $5.8 million in profits. Ameritrade had sales of $73.9 million with $8.1 million in net income, while DLJ Direct generated in $47.2 million in revenue and $7.2 million in net income.
Insert-----looks like their profit/revenues is a better # @ first glance, now If they can rev up the revenues the profits should follow as long as margins continue to be good.-----end of Insert
Bottom Line:
Even after the recent setback in net stocks, E*Trade and Ameritrade shares
are still up 256% and 401%, respectively, year-to-date. With online trading continuing to gain popularity, investors should expect similar performance out of DLJ Direct.
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