E*Trade Is A Bargain Right Now

The St. Louis Rams were the big winners Sunday in one of the most
exciting Super Bowls ever.

E*Trade Group Inc. (EGRP)
hopes it will emerge as the game’s other big winner. The No. 2 online
broker spent $5 million to sponsor a star-studded halftime show aimed at
an expected audience of 80 million or more as well as market leader
Charles Schwab (SCH).

E*Trade has been closing the gap, thanks in large part to an aggressive
marketing campaign. Unlike a number of Internet companies that were
betting everything on ads during this “dot.com”-drenched Super Bowl,
E*Trade’s outlay comprised only a small percentage of its promotional
costs.

After spending $301 million on sales and marketing in fiscal 1999,
E*Trade upped the pace in the quarter ended Dec. 31 as promotional
spending reached $119.5 million. This breaks down to $289 per new
account, according to E*Trade, compared to $198 per new account in the
previous quarter.

The results of this push, as evidenced by the company’s Jan. 19
quarterly report, have been impressive. In its fiscal Q1 ended Dec. 31,
E*Trade’s daily trading volume increased 65 percent over the year-ago
quarter, while revenues grew to $246 million, 42 percent above the $173 million
in last year’s first quarter.

While Charles Schwab’s market share more than doubled E*Trade’s in Q1
’99, the gap was narrowed last quarter, when Schwab handled 23.3 percent of
online trades versus 15.1 percent for E*Trade.

Despite this tangible evidence that E*Trade is emerging as one of the
top-tier online brokers and financial services providers, the company’s
stock continues to languish. EGRP was trading Monday afternoon at 21
3/8, much closer to its 52-week low of 17 17/32 last Feb. 10 than its
52-week high of 72-1/2 reached last April 14.

With the exception of a brief rally in November that took it close to
$40 per share, EGRP sat on the sidelines while other Internet stocks
soared into the new year. Shares are down 19 percent since Dec. 31.

As with Amazon.com (AMZN), investors are growing nervous over E*Trade’s
strategy of building brand at the expense of immediate profits. The
company lost $5.2 million last quarter, or 15 cents per share. And
though it easily beat street estimates of a 21-cents-per-share loss,
EGRP fell for several days after Jan. 19’s report.

With a market cap of $5.86 billion, the company is valued at 7.8x
trailing 12 months’ revenue of $751 million. Against revenue forecasts
of $922.9 million in fiscal 2000, EGRP is at a multiple of 6.4x
projected 2000 revenues.

I put E*Trade on the HotWatch 2000 list of 10 Internet stocks to watch
this year because I felt that, sooner or later, investors would reward
E*Trade’s aggressive strategy, growing market share and brand awareness.
The company’s Q1 numbers strengthen this conviction.


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