The Wall Street Journal Interactive Edition -- July 30, 1998
E*Trade Expects Its Stock
Will Benefit From Losses
By REBECCA BUCKMAN
Staff Reporter of THE WALL STREET JOURNAL
For many highflying Internet companies lately, losing money has been a ticket
to a higher share price.
But at least for now, it looks like aspiring cyber-player E*Trade Group may
have missed the bus.
E*Trade, the No. 2 on-line brokerage firm in
terms of market share, has always been
considered a hybrid stock: part
financial-services company, part Internet play.
These days, though, the Palo Alto, Calif.,
company is trying to position itself as an emerging Internet dynamo.
E*Trade can't stop talking about its glitzy, soon-to-be-unveiled "destination"
site on the Web; company officials now throw out Internet jargon such as
"page views" and "browser share" as easily as balance-sheet basics like
"revenue" and "net interest income."
Last week, E*Trade made its boldest move yet: As it announced its fiscal
third-quarter earnings, the company also surprised analysts by declaring it
would plunge into the red in the next several quarters to spend millions more
on marketing, acquisitions and alliances.
Chief Executive Christos Cotsakos told
analysts he was willing to incur what he
called "opportunity losses" to transform
E*Trade into "one of the blue-chip
Internet companies for the 21st
century."
That spend-now, earn-later strategy
recently has proved a boon for many
money-losing Internet companies,
including search-engine Yahoo! and
on-line bookseller Amazon.com. But
the news that E*Trade planned to start
incurring losses sent its shares tumbling
-- the opposite, most likely, of "what
[E*Trade officials] were hoping would
happen," according to Raymond James
analyst Phil Leigh.
E*Trade's stock price sank 10% the day
after earnings were released, and are
now down 17% from their
preannouncement level. The stock
closed Wednesday at 26 1/2, and has now given back most of the 10-point kick
it got earlier this month, when Japanese software company Softbank
announced it would invest $400 million in the firm. E*Trade's current
stock-market value is $1.04 billion.
By contrast, shares of E*Trade competitor Ameritrade Holding, a company
that has cut back on expensive advertising to boost profit, rose 13% during
the same period, after Ameritrade reported better-than-expected profit.
E*Trade's Mr. Cotsakos says his stock has always been somewhat "weighted
down" by the "traditional metrics" used to measure its performance, such as
customer assets and average daily transactions. After the company announced
its change in strategy, "I think you had people taking profits," he theorized,
"and some people saying, 'I liked the old model because it was predictable.' "
Analyst David Readerman of NationsBanc Montgomery Securities seems to be
a fan of the old model. Last week, he downgraded the stock to "hold" from
"buy," explaining, "One of the unique characteristics of E*Trade was that it
was one of the few profitable Internet stories." Still, Mr. Readerman says he
"respects [Mr. Cotsakos's] decision to try to increase shareholder value for the
long term."
Other investors may simply be waiting for the company to flesh out specifics
of its spending program. Yet to be seen, for example, is the reaction to
E*Trade's revamped Web site, which will soon offer new services such as
insurance, other banking-type products and even books.
An initial version of the site goes on-line for noncustomers after Labor Day.
The new site's success in attracting new customers is "the key to the stock
going forward, period," says Hambrecht & Quist analyst Genni Combes.
And while E*Trade's fiscal third-quarter profit of $6.6 million, or 16 cents a
diluted share, generally met analysts' forecasts, concern over issues such as
slower subscriber growth may have hurt the stock. The results also included a
nonsustainable lift from higher payments E*Trade gets from Nasdaq
market-makers for sending trade orders their way.
BancAmerica Robertson Stephens analyst Keith Benjamin says E*Trade shares
can't be expected to shoot up like those of Amazon.com or Yahoo! because,
as he put it, "I think there's the perception here that the competitive
environment is more intense than with Amazon."
E*Trade is battling for market share with well-funded companies such as
Charles Schwab, Fidelity Investments and the DLJdirect unit of Donaldson,
Lufkin & Jenrette.
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