Duh, lets see if JBOH can deal: "E*Trade Stumbles a Bit, But Still Pursues Growth By REBECCA BUCKMAN
Staff Reporter of THE WALL STREET JOURNAL
In the race to build a hot Internet-trading business, E*Trade Group has hit
some big speed bumps: Its computer system crashed on three consecutive
days; irate customers are suing. Its stock is down 40% from a recent
peak. Insiders have been dumping shares.
But the online-brokerage firm is plowing ahead in overdrive. The Palo
Alto, Calif., concern continues to unveil strategic investments and other
business plans it hopes could transform it into a more diversified securities
firm.
Just last week, E*Trade got approval to start
selling its own brand of mutual funds, which
should give it some steady revenue amid
market stresses. Late last year, the firm
announced plans to invest nearly $25 million in
Archipelago, a cutting-edge electronic-trading
system that also attracted the investment
interest of Wall Street titan Goldman, Sachs &
Co. And E*Trade recently outlined plans to
go into business with well-known Silicon
Valley banker Sanford Robertson to open an
online investment bank focused on small,
high-tech companies.
Now, the buzz is that E*Trade is among the
online-brokerage firms on the radar screen of Goldman, which is exploring
ways to enter the Internet-trading business -- including potentially buying
an online broker.
E*Trade and Goldman are "clearly laying the groundwork for some type
of long-term relationship," says Bill Burnham, who covers
electronic-commerce companies for Credit Suisse First Boston Corp.
"Indications from them are that there are additional steps under
consideration."
Don't expect any big announcements anytime soon. Goldman Managing
Director Duncan Niederauer says his firm was happy to explore the
Archipelago project with E*Trade. Goldman also cut E*Trade in on two
of last year's most sought-after Internet stock offerings, online auctioneer
eBay and Web-site host GeoCities; some E*Trade customers got a few
shares of those deals. But Mr. Niederauer stresses that Goldman probably
won't strike exclusive deals with any online broker.
Kathy Levinson, E*Trade's chief operating officer, says, "We obviously
have a relationship with Goldman on the Archipelago deal, and we've also
been in on a couple of the [IPO] deals. Whether we do anything beyond
that is yet to be seen."
Still, the murmurs have some investors jumping in, including some who
recently had pared their E*Trade holdings. Paul Cook, who manages
Munder NetNet Fund, recently snapped up 125,000 shares after dumping
some of his E*Trade holdings last month. E*Trade now makes up 2% of
his $760 million-asset portfolio.
"E*Trade is looked on as the beacon" of the online-brokerage industry,
Mr. Cook says. Though other firms handle more trades -- Charles
Schwab is by far the largest online broker -- E*Trade's brand name gives
it "Amazon.com-like status" in the computerized-brokerage business, Mr.
Cook says, referring to the well-known online book seller.
Yet even fans have reservations. Mr. Cook, for one, worries about the
firm's ability to keep up with its hypergrowth. "I don't know whether to be
encouraged by the heavy volumes or discouraged," Mr. Cook says. That's
because, he says, "the management team doesn't seem to be able to
prepare for the growth of the company."
Other online brokerage firms have had computer glitches, of course. And
E*Trade officials insist that relatively few customers have been affected by
the recent outages. But the firm has had some of the most high-profile
snafus, particularly for a company that brags so much about its technology.
And that could impair the trust of some customers.
Clients want to know: Can I get at my assets when I want to? Am I
assured that this is the best place for my net worth to be sitting? "Even if
it's one-tenth of 1% of customers affected, it is likely too much," Mr. Cook
says. "It's the perception."
In the long run, some analysts argue, E*Trade's technical problems will be
ironed out. "All the lawsuits and the down time, I think it's really a
short-term bump," says Greg Smith, a financial-services analyst at Putnam,
Lovell de Guardiola & Thornton in San Francisco.
Though Mr. Smith worries about the continuing "froth" surrounding all
Internet stocks and is maintaining a "hold" rating on E*Trade, he believes
the firm's "recent announcements have been so good" that the company is
a keeper for the long term.
Says Phil Leigh, an electronic-commerce analyst with Raymond James &
Associates who also has a "hold" on the stock: "I'm looking for an
opportunity to upgrade it." E*Trade's shares closed Friday on the Nasdaq
Stock Market at $40.125, up 93.75 cents, down 40% from their
split-adjusted 52-week high of $66.4375, reached Feb. 1.
Caught up in the wider Web-stock frenzy, E*Trade's shares had surged
more than tenfold from October to late January, notes James Marks, an
analyst at Deutsche Bank Securities. Its recent correction was "overdue"
he says.
What's clear is the increasing power now wielded by online brokers. One
of the reasons E*Trade's computer systems have been on the fritz is the
firm's exploding customer base. At the end of last year, E*Trade had
676,000 customer accounts, more than double the number a year earlier.
Mr. Burnham, the Credit Suisse First Boston analyst, estimates that
E*Trade's share of the online-trading market has risen to 11.8% from
10.9% in last year's third quarter. Although it remains far smaller than
Schwab, E*Trade is now processing nearly 40,000 online trades a day, up
from 27,450 just a quarter ago.
In their own ways, many online brokers are struggling to handle the crush
of trades. For the past two months, Schwab has offered new perks to its
employees to keep them motivated, including $500 bonuses for all
nonofficers and even a "concierge" service to help employees with grocery
shopping, babysitting and even pet walking.
The current frenzied level of business can't continue, some specialists say,
which would put some short-term pressure on the stocks of all online
brokers. Analysts also wonder what will happen to shares of E*Trade and
its competitors when or if the Internet-bubble were punctured.
But given the interest traditional Wall Street firms and banks continue to
take toward the Internet, Mr. Marks says, already-established online
players such as E*Trade "are in an incredibly enviable position." |
