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E*Trade Pauses As Winners Take Profits

E*Trade (Nasdaq: EGRP) has been developing a winning formula since it first launched, but it hasn't always gotten credit for CEO Costakos's vision.

One of the early Internet IPOs -- the company went public in August 1996 -- the Street took a long time before it would give the stock a second look.

After languishing at a split-adjusted level of just under $10 for most of 1998, EGRP tripled in January 1999 and then more than doubled in April. The first spike was a result of E*Trade demonstrating that it was winning over online traders as it closed with solid gains in its customer base and profitability.

The second spike was a gift the entire Internet category enjoyed as IPO fever set in, peppered in the online trade category by the $320 million initial offering of Donaldson Lufkin Jenrette spin-off DLJ Direct.

With some of the early believers looking at paper profits of as much as 500 percent in May, some profit-taking was to be expected. At yesterday's close, E*Trade is now down 58 percent from its all-time high in April.

What the markets should have embraced as wonderful news, the addition of 322,000 new E*Trade accounts to reach 1.24 active accounts, was dismissed as just more of the same: more phenomenal growth, gaining incredible market share in a booming market. Wall Street is expressing impatience because E*Trade has begun to spend heavily on advertising, increasing media buying 6X. As a result, EGRP lost $24.2 million in the third quarter, down from a profit of $5.1 million a year ago.

The stocks of E*Trade's online trading competitors are faring no better. AmeriTrade (Nasdaq: AMTD) and DLJ Direct (Nasdaq: DIR) are both down in recent weeks. For AMTD the news is not dismal: down 56 percent from its April high, but still up for the year. DIR, on the other hand, is now trading at roughly its initial offering price, down 46 percent rom its high of 45.

The message is still clear: market share matters. The Internet land grab is not over. DLJ Direct still badly trails E*Trade in the size of its customer base (it now has 656,000, only 42 percent more than it did a year ago). E*Trade is adding customers at roughly 4X the rate of DLJ Direct.

In the short term, profit taking may continue. But in the long run, E*Trade is still ahead in the number of customers and pulling away. It is posting the numbers that really matter.