THREAD---INTERESTING ---Charles Schwab Corp.
The Wall Street Journal -- April 15, 1999
Heard on the Street:
Ameritrade Rockets as Online Trading
Surges,
But Some Question How High It Can Climb
----
By Rebecca Buckman
Staff Reporter of The Wall Street Journal
OMAHA, Neb. -- Online brokerage firm Ameritrade Holding lacks the brand name or market heft
of Charles Schwab. It doesn't boast the high-tech, razzle-dazzle of E*Trade Group, a Silicon Valley
upstart.
But to look at Ameritrade's zooming stock -- up 840% this year even after a drop yesterday -- you'd
think it, well, invented the Internet.
Shares of the nation's sixth-largest online stockbroker -- which has attracted scores of investors from
its razor-thin $8 commissions on stock trades -- have rocketed to staggering levels over the past few
months. To put it in perspective, when the stock pulled back 25 1/4, or 15%, yesterday, to 148 on
the Nasdaq Stock Market, the point decline was more than the overall price that the stock started
the year: a split-adjusted 15 3/4. In other words, the pullback appears as only a hiccup on the year's
stock chart.
The rally has left Ameritrade founder J. Joe Ricketts, who with his family controls 63% of the
company's shares, with an Ameritrade stake now valued at roughly $5.4 billion. (He launched the
company in 1975 with $10,500 in borrowed money.)
Investors aren't complaining. Thanks partly to trigger-happy "day traders" in Web chat rooms
searching for momentum stocks, Ameritrade shares have drubbed the otherwise impressive
year-to-date rallies of 151% for Schwab and 307% for E*Trade.
After the market closed yesterday, Ameritrade reported fiscal second-quarter net income of $8.1
million, or 14 cents a share, compared with a loss of $300,000 in the year-earlier quarter. The results
for the period ended March 31 were double that of analysts' expectations and sent the stock up
seven points in after-hours trading.
But the warp-speed run in Ameritrade's stock has some analysts and money managers waving red
flags -- well, at least yellow ones. At these nosebleed levels, the stock is more vulnerable than most
to a stock-market decline or a swoon in the Internet sector. The company also continues to face
growing pains.
"This is just crazy," says Greg Smith, an analyst at Putnam, Lovell, de Guardiola & Thornton. "Any
fundamental analysis you do, it's very difficult to get to today's valuation."
Part of the run-up stems from Ameritrade's huge first-quarter growth, as investors have swarmed to
open new brokerage accounts and grab a piece of the still-advancing stock market.
But that is partly why Ameritrade continues to grapple with transforming itself from a tiny,
Midwestern brokerage firm to a high-volume power on the Internet. Though Ameritrade's online
market share trails that of Schwab and E*Trade, among others, its computer systems last year
couldn't handle the crush of new, electronic business generated by a $43 million, nationwide
advertising campaign. On several occasions, investors couldn't access their accounts or place trades
-- leaving the company red-faced.
And though many online brokers have suffered outages as Internet trading has become more
ubiquitous -- about one in every seven equity trades is now placed over the Internet -- the snafus at
Ameritrade, a company founded as a traditional, discount broker, were some of the most serious.
The company's technology is improving, analysts say, though a longtime project to install new
computer "middleware" -- which routes customer requests for information and transactions to the
core computer servers -- still isn't finished. So in March, the company hired a technology specialist
and former insurance executive, Tom Lewis, as its new co-chief executive officer.
He has quite a challenge. Charged with upgrading the company's computer systems and
phone-based, customer-service operations, Mr. Lewis also must find ways to make Ameritrade
stand out from the scores of other low-price brokers now fighting to snare new cybertraders. Since it
first made a splash with $8 stock trades in the fall of 1997, Ameritrade's price has been undercut by
several rivals, including Datek Online and Fleet Financial Group's Suretrade.
Still, Ameritrade's commissions are much cheaper than those at market leaders Schwab and
E*Trade: Schwab, which controls the largest chunk of the online market, charges a flat fee of
$29.95; stock trades at E*Trade are usually $14.95 or $19.95.
Mr. Lewis says his company is positioned well. He and his new technology team, including Chief
Information Officer James Ditmore, he contends, are "really getting a handle on this thing." The
computer upgrade isn't as complex as others he has handled, he adds. It should be completed by
summer, in time for an expected influx of new accounts in the fall.
Ameritrade is "not running on the edge of disaster," Mr. Lewis says bluntly. Gesturing toward Mr.
Ditmore, he says: "If it was a disaster, neither one of us would be here."
Most analysts say Ameritrade will overcome its technology glitches, which peaked last year when the
company ran into problems installing the middleware.
"Relative to where they were a year ago, Ameritrade has made incredible progress," says analyst Bill
Burnham, with Credit Suisse First Boston.
Mr. Ditmore, a former colleague of Mr. Lewis's at insurance concern USF&G, now a unit of St. Paul
Cos., says his staff has already started removing bottlenecks from Ameritrade's current technical
infrastructure.
Soon, it will install new servers, and the company will "stress-test" the system early this summer to
make sure it can handle more customers, Mr. Lewis says. Then Ameritrade can make more Web site
enhancements and possibly launch a service for especially active traders, as E*Trade has done,
officials say.
To beef up its customer-service, Ameritrade also last month hired Jack McDonnell from credit-card
processor First Data as chief executive of its main brokerage unit. Mr. McDonnell has experience
running large businesses with multiple locations and call centers, Mr. Lewis notes.
The 57-year-old Mr. Ricketts, for his part, says the company's management is shifting to "a more
professional style" after being run in an "entrepreneurial manner" since he founded it. Ameritrade
doesn't have a choice, he argues: "The growth is really staggering."
There's no doubt that Ameritrade's business is humming. In a sign that the company's computer
systems now can handle higher volumes of business, investors opened 82,000 new accounts in the
quarter ended March 31, bringing the firm's total to 428,000. Ameritrade's lure: its no-nonsense sales
pitch and low commissions.
To be sure, active trading by individual investors has lifted all boats on Wall Street this quarter.
Ameritrade also pulled back a bit from expensive TV advertising to keep from overloading its fragile
systems with new customers.
Still, Mr. Ricketts expects the company to step up spending in the fall. Last year, the company ran
losses for six months to advertise heavily and build a brand name.
Through it all, however, Ameritrade's growth just doesn't justify the stock's current level, some
analysts and fund managers say. If the momentum behind the Internet sector "switches directions, I
wouldn't want to be trying to get out of one of these stocks," says Putnam Lovell's Mr. Smith.
Because Ameritrade earned just one cent a share in fiscal 1998, ended Sept. 25, Mr. Smith analyzes
its trailing price-to-revenue multiple, instead of price to earnings. He pegs the number at 53 times
revenue, compared with 47 times for E*Trade and 21 times for Schwab.
The numbers are high compared with traditional brokers, Mr. Smith says, though not compared with
many other Internet companies, including recent initial public stock offerings.
Some Ameritrade investors say they are willing to take the risk. Steven Appledorn, a senior portfolio
manager for the Munder NetNet fund, which owns Ameritrade shares, says online brokers such as
Ameritrade, E*Trade and Schwab are "kind of the tail of the tiger, because they're not only Internet
stocks, but companies directly involved in much of the activity" that is fueling the stocks' sharp rise.
The stocks have "two times the upside, and two times the downside," he says.
There's a place at the table for Schwab, E*Trade and Ameritrade, Mr. Appledorn argues. (The three
brokerage concerns make up about 5% of his portfolio.) He contends that Ameritrade can succeed
as a no-frills, transaction-oriented broker -- as opposed to Schwab and E*Trade, which are racing
to offer more advice-oriented services.
Says Mr. Appledorn: "We don't think these guys necessarily win or lose at each other's expense."
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