from stockhouse
December 8, 1999
StockHouse News Desk
By Jack Bensimon (jbensimon@stockhouse.com)
StockHouse Columnist
E-Trade Gears Up With Telebanc Merger And China Internet Thrust
Toronto, ONT, December 8 /SHfn/ -- IE-Trade Group, Inc. [EGRP] is the world's most visited on-line
investing site and ranked by Gomez Advisors as the number one on-line brokerage firm. While popular
with investors, however, the company, in terms of assets in accounts, is ranked as the third largest
on-line brokerage firm, behind Schwab [SCH] and TD Waterhouse [TWE]. But what E-Trade has
underway could well vault the company into first place on the asset side as well.
The first strategic move is an impending merger with Telebanc [TBFC], the largest US cyberbank. If this
goes through, E-Trade basically becomes a bank, with a larger customer base and much wider product
offering.
The second thrust is the link with Sina.com, in order to capture a larger share of the world's Chinese
language Internet trading. The company already has an overseas presence in Europe, Middle East, Asia
and Australia. But the Sina.com connection positions the company on a track to capture a big share in
what could be an enormous market.
E-Trade's stock has not yet reflected the positive news coming out of the
company. The sell-off in the on-line brokerage sector since April took
E-Trade from a high of $72 to a recent low of $20 (now trading in the $30
range). There are several reasons behind the sector's downtrend: First,
the number of trades per account has declined. Second, commissions
received per trade have been reduced by 5-10%. Third, the average
account size is not expected to grow from the average $18,000-20,000.
Fourth, the introduction of American Express's new on-line brokerage
program could attract high-end customers, resulting in firms like Schwab,
E-Trade, and TD Waterhouse getting the smaller accounts. Finally,
E-Trade's last quarter's results were disappointing as uncertainty loomed
over when the company would eventually become profitable.
Entry Into Chinese Market Essential To E-Trade's Corporate Strategy
It is expected that China will be the largest Internet market in the Asian-Pacific region (except Japan) by
2001. E-Trade Group is intending to exploit this trend by establishing partnerships and alliances in this
region. The current Internet penetration rate in urban China is 3.5%, expected to rise to 11% (2002). In
1999, there were 3.8 million Internet users in China, with 16 million expected by 2003.
E-Trade has entered into a content partnership with Sina.com (Chinese for "new wave"), which operates
the world's largest network of Chinese-language Web sites, targeting the 1.5B people of Chinese descent
worldwide. Sina.com, which is a content portal, has 900,000 registered users and logs 180 million page
views per month. As a way of attracting customers, E-Trade will offer stock and mutual fund tracking for
Sina.com users, and with over 1M millionaires in China (in $US), the on-line investing market could prove
to be enormous. Softbank, Japan's leading Internet investment company which has risen 10-fold this year
and has a 27% stake in E-Trade, expects China to become the biggest Internet market within 5 years.
An analyst at a leading US investment bank told StockHouse the Chinese market will be central to
E-Trade's strategy of attracting a client base that represents a substantial amount of trading revenue.
Telebanc Merger To Add A Substantial Asset Base To E-Trade, While Costs Per Customer Are
Falling
Sources tell StockHouse that E-Trade will likely close on its stock-for-stock acquisition of Telebanc by
end of 1999. If the merger goes through, E-Trade's dependency on trading revenue will decline from close
to 60% to less than 50% as a result of the diversification in revenue base, according to an E-Trade
spokesperson. This bodes well for a more stable revenue base in the future.
At the same time, on the cost side, while marketing expenditures have
increased substantially year-over-year, E-Trade is unequalled among the
top three firms in efficiently attracting customers. For example, the
company has lowered its cost of acquiring new customers by 17% from
$238 per customer to $198. The company is continuing to build on its
existing brand equity. The company's free Website is the most heavily
visited finance portal on the Internet. On the IPO front, it is quickly
ramping up the number of IPOs available to retail customers in the
primary market. Analysts have expressed some concern over the costly
marketing program hurting gross margins. However, the combination of
aggressive market penetration, low price points, and unparalleled service
that has propelled E-trade in the past is expected to give it an edge
vis-a-vis competitors such as Schwab, TD Waterhouse, and Datek
On-Line.
E-Trade's sales growth, from $157 million in 1997 to $621 million in 1999, has surpassed those of its
rivals, although it is experiencing some slowing in the last quarter along with others. Its ability to generate
cash flow growth and steadily increasing shareholder value, makes the current stock price attractive.
Value-Line analyst Perry Roth expects a 31% annual return on the stock to year 2002.
Technical Considerations
The stock has recently experienced some selling pressure owing to lower than expected EPS growth.
Support is indicated in the $30-33 range; this level additionally represents a 50% correction of the latest
upswing which took the stock from its $20 low to $40. A substantial breakout would occur at levels above
the $37-38 price range. Given the high market risk (beta = 2.16), this stock is highly sensitive to broad
market gyrations.
Telebanc Deal, Y2K Relief Rally, Could Be Triggers
Investors looking for a trigger for online discount broker share prices need only check the Nasdaq trading
volumes. While Y2K may slow things down later this month, a relief upswing in the first half of 2000 is
likely. For E-Trade, however, the closing of the Telebanc deal could be the news that provides the initial
upside momentum. Following that, some encouraging statistics from its Sina.com link would be positive.
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