E-Loan: For Richer, for Poorer

June 30, 1999 — E-Loan (EELN), the largest online mortgage company went public and quickly saw its shares
jump from a $14 offering price to $40, before closing at $37. A rise of more
than 160 percent and its market value was nearly $1.5 billion after only one
day of trading. The stock would hit a high of nearly $75 that week.

September 30, 1999 — The company announced its third quarter losses would be
greater than expected. First Call had projected a loss of 29 cents per share
but officials at E-Loan said that losses would be closer to 35 cents per

Fast forward to today, December 29, 1999. Shares are trading at 16-15/16,
just a fraction of a point above the stock’s 52 week low.

How did things turn so bad, so quickly, for a stock with so much potential?

E-Loan wants to be your one stop destination to find, compare, and apply for
loans online. With a database of over 50,000 loan products from more than
70 of the nation’s top lenders, E-Loan recently began to act as a lender
itself. So the company wants a bigger piece of the pie.

And it certainly is a large pie. Deutsche Bank projects an online mortgage
volume of $250 billion in 2003 or roughly 25 percent of total mortgages.

Aside from writing its own loans, the company has also made strategic moves
over the last six months in order to reach foreign markets (Australia, the
U.K. and Japan) and expand their product/service offerings (auto, credit and
small business loans). International reach and business scalability is
critical for growth and survival in the Internet world.

So why have Investors continued to drive the stock down? There are low
barriers to entry in most business-to-consumer (B2C) arenas, especially for
the online mortgage/loan market. Large banks, lending institutions and
entrpreneurs are all biting or eyeing the pie. Companies such as Mortgage.com (MDCM)
, WingSpanBank.com, Intuit (INTU)
and Microsoft Corp. (MSFT)
are all competing with E-Loan.

Microsoft (Home Advisor), with plans to license its online lending
technology to financial institutions is of particular concern. Chase, the
nation’s largest residential mortgage lender recently agreed to integrate
MSN’s Home Advisor loan finder and financing tools into its Web site.
Microsoft will receive a licensing fee plus a percentage of each

Concerns over, and actual rising Interest rates, have always hammered
financial stocks and growth stocks (Internet stocks). I like to therefore
consider consider E-Loan “double trouble” in that any forecast or actual
hike in Interest rates will have a dramatic, adverse effect on its business
and stock price. Interest rate hikes mean companies will borrow less money.
This hurts E-Loan’s infrastructure growth as well as its core business of
loaning money and facilitating loan transactions online.

Conclusion: E-Loan is only one player in an increasingly large market.
E-Loan’s fall from grace has been the result of widening losses, pricing
pressure due to competition, and Interest rate concerns. I expect these
trends to continue for the near future, but any change in these trends could
present upside for the stock. For now, Internet investors would be better
off riding the fourth quarter Net momentum in another Net sector.

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