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C Y B E R S T O C K
E*Trade: Can This
Financial Services
Steamroller Be
Stopped?
January 15, 1999
By Matthew W. Ragas, Editor
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Ragas Speaks for the Week
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 (EGRP) is no longer just
a threat to online brokers such as Waterhouse,
Charles Schwab (SCH) and AmeriTrade
(AMTD).
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 (MER) 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 (C).
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 (AOL), Yahoo! (YHOO)
and ZDNet (ZD). 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 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
CompUSA (CPU) 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. |
