Yesterday’s announcement from Knight/Trimark Group Inc. (NITE)
is no fluke. The third quarter for online trading slowed.
Knight/Trimark is a leading Nasdaq market maker, dealing in over 7,000
stocks (the firm makes money from the difference between the bid and ask
prices of a security). The company warned analysts that their estimates
were completely off. Whereas First Call pegged estimates at 30 cents,
Knight/Trimark said it will likely be between 17 and 19 cents. The company
will report its earnings on Wednesday.
No doubt, the stock plunged 3-39/64 to 26-3/8. The stock traded as high as
81-5/8 in May.
The reasons for the revised estimates? First of all, there was a five
percent fall in third-quarter trading volume compared to the second
quarter. And, of course, volume is a critical earnings driver for any
brokerage-related company.
Next, the company saw a fall in revenue-per-trade. In fact, the company
classified the drop as “dramatic.”
Of course, online brokers fell across the board. Here’s a chart:
Companies | Price | Change | 52-week | % off | Market Cap |
high | high | (in billions) | |||
E*TRADE | $ 25.94 | $ | $ | 64% | $ 6.00 |
DLJDirect | $ 15.13 | $ | $ 45.63 | 67% | $ 1.50 |
Ameritrade | $ 18.88 | $ (0.88) | $ | 70% | $ 3.20 |
NDB | $ 25.38 | $ | $ | 73% | $ 0.43 |
TD Waterhouse | $ 12.50 | $ | $ | 54% | $ |
Schwab | $ 33.50 | $ | $ | 57% | $ |
Siebert | $ 15.63 | $ | $ | 78% | $ 0.35 |
But as you can see from the chart, the e-brokers had only minimal falls. In
other words, Wall Street seems to be pricing in the fact that there will be
a slowing in earnings.
Also notice that these e-brokers are all selling more than 50 percent from their
highs.
I think this represents a great opportunity.
But I would focus on the top-tier brokers. The one that looks particularly
compelling is E*TRADE (EGRP)
. In fact, the company reports its earnings on Wednesday. It has
already pre-announced that revenues and trading volume will be flat.
Thus, there is definitely a possibility of a surprise, given the extreme
negativity towards the sector.
Things, though, look bright for the short-term and long-term. The online
brokerage industry is flush with cash and it is spending it on marketing
campaigns, which will drive volume. For example, TD Waterhouse recently
announced it will spend $100 million on an ad campaign with Geena Davis and
Jackie Chan (TD Waterhouse raised $740 million in its IPO). In fact,
according to Lehman Bros., the online brokerage industry will spend $1.2
billion in ads in the year 2000. More accounts, more volume.
But E*TRADE is building a tremendous platform to leverage the growing base
of users.
For example, E*TRADE purchased Confluent Inc., which develops sophisticated
personal finance tools — such as for tracking corporate events, like
earnings announcements, stock splits, dividend declarations, as well as
track automatic deposits, bill presentment and investment plans.
By adding such value-added features, E*TRADE has been able to create a
highly sticky site. The company is only second to eBay in minutes per user
per month spent on its site (66.5 minutes)
Further, E*TRADE has been aggressively diversifying its revenue-base away
from brokerage transactions. In a sense, E*TRADE is becoming a one-stop
shop for financial planning.
The company recently invested in LoanCity.com, so as to provide home loans.
There was also the purchase of Telebanc, the nation’s largest online bank
(it’s bigger than the next five pure Net banks combined).
Perhaps the most compelling part of E*TRADE is the growth in international
financial markets. This month, the company announced a joint venture with
SOFTBANK to create E*TRADE Japan, so as to take advantage of the
deregulation of commission rates in that country (Japan has the second
highest number of Net users: 18 million). In all, E*TRADE has six global
sites.
It is almost impossible to find a bottom for markets. But when there is
very bad news — such as from Knight/Trimark — and the rest of the sector is
relatively unaffected, this is usually a good sign of a bottom.
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