Speaking of results, let's look at what you call growing losses but what I call a growing investment in the company. Here's the way I see it:
E*Trade Operating Profit / Advertising Expenses (millions) Fiscal Year Ending 9/30 '00E '99 '98 '97 Operating income (loss) (241) (132) 3 30 Advertising Expenses 478 302 117 67 Annual Growth 58% 157% 74% Oper Inc minus Ad Expense 237 169 120 98 Annual Growth 40% 41% 23%The 2000 estimates are the simplest possible -- I just multiplied Q1 results by four -- so I wouldn't bet the farm on them, but they do fill out an improving picture. The core business continues to grow at a strong clip while spending on advertising may actually tail off this year. As for valuation, E*Trade is currently trading at roughly 75 times operating profit before advertising compared to 90 times for Schwab (assuming a 35% tax rate for both) while E*Trade grew revenues by 112% in the year ending 12/31/99, versus 43% for Schwab. Looks like one of those well-heeled competitors you spoke of may actually be the pricier deal, eh?
Turning our attention to American Express, they're joining the race a little late, wouldn't you say? Charles Schwab has been around for 25 years, and the name for longer than that, but Schwab hasn't exactly buried E*Trade. And the free trading argument rings hollow too. After all, Schwab continues to charge almost three times Ameritrade's basic trade rate, but I haven't noticed a stampede away from Charley's place. With AOL's success top-of-mind, I ask: Which would your rather move, your ISP or a suite of bank and brokerage accounts?
Finally, the online broker market is not so muddled. Clear lines of delineation have emerged.
On one hand, we have the trade-focused e-brokers -- Ameritrade, Datek, ScoTTrade, etc. -- who offer the best value to the net-savvy active trader. But, from the investment angle, their typical customers are the first to jump ship for a lower trade price. Talk about eroding margins! In fact, it is precisely this strong dependence on trading volumes and margin loan interest that should render them -- not E*Trade -- as the first victims of the eventual bear market.
On the other hand, we have the "bricks and clicks" models like Schwab and TD Waterhouse. The question is not whether these guys will survive -- they will. In fact, there is a growing sentiment that says the pure e-brokers will have to have to join these guys in developing a storefront presence in order to build customer relationships the old-fashioned way.
I disagree. After all, the last few times I've stopped by my parents house, I've noticed that the VCR clock is no longer flashing and my folks appear to have mastered multiple remote controls. Yes, applications via the Internet will scare off the same folks who'd rather hand some high school kid their credit card at a restaurant -- and watch him walk off with it -- than send its encrypted digital code across buried cable. But this will gradually change. It's inevitable.
In the middle, by itself, is E*Trade. They will hold the line on the Internet-only model, reaping the margin rewards and building Web advertising revenue on the side, while expanding the core financial business to meet their aggressive vision.
This Week's Duel
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