For ETrade, No More Monkey Business
Seeking to shed its image as a quirky, irreverent online broker, ETrade Group Inc. is putting on a pinstripe suit.
The idea is to morph into a financial services octopus, peddling home loans, checking accounts, credit cards, insurance, financial advice and stock.
The biggest banks in the world have been attempting similar transformations for the better part of two decades with little success, said J.P. Morgan Chase & Co. analyst Gregory Smith.
“The strategy makes sense, but can ETrade be the one to do it right?” Smith said.
The uninspiring diversification efforts of traditional banks have only deepened the conviction of ETrade Chief Executive Christos Cotsakos that his strategy is sound.
“Nobody has been able to do it, and that’s what makes it an opportunistic time for us to try it,” Cotsakos said. “We have always been about changing the rules of engagement.”
ETrade signaled its new direction on Super Bowl Sunday with a TV commercial that bid farewell to its playful monkey mascot. The Menlo Park, Calif., company then introduced a redesigned Web site highlighting other financial services besides the stock trading that used to be its bread and butter.
The site also bears a new brand, “ETrade Financial,” to emphasize the new identity, which will be promoted in a three-month marketing blitz.
This isn’t a sudden shift.
During the last five years, ETrade has poured about $5 billion into acquisitions and technology to help create what it believes is a one-stop shop for financial services.
Cotsakos, who became CEO in 1996 after studying consumer behavior at A.C. Nielsen, believed a Web site offering a smorgasbord of financial products would appeal to an increasingly technology-savvy audience--primarily people ranging from age 24 to 54.
Although many analysts have questioned the strategy, the diversification helped ETrade weather the last year’s tumbling stock market better than most online brokers.
“This more holistic approach to financial services really proved to be their saving grace,” said industry analyst Tim Butler of Pacific Crest Securities.
Like much of the brokerage industry, ETrade downsized in 2001, resulting in charges that produced a $241.5-million net loss for the year, on revenue of $1.3 billion. Excluding special charges, however, ETrade says it has been profitable for six consecutive quarters.
A mortgage division ETrade bought for $36million in early 2001 produced major dividends as interest rates plunged and spurred a rush to refinance home loans last year. The surge helped boost the company’s fourth-quarter profit from continuing operations to $24.7million, quadruple the $6million of a year earlier. Fourth-quarter revenue totaled $345million, up 3% from a year earlier.
As it broadens its menu, ETrade is becoming less dependent on stock trading. For example, in the final three months of 2001, ETrade collected one-third of its revenue from its banking operations; at the end of 2000 just one-sixth of the company’s revenue came from banking.
ETrade’s diversification hasn’t been limited to its Web site. The company also is building a bricks-and-mortar distribution network with 11,000 automated teller machines and dozens of 400-square-foot branches in Target stores.
In another step to expand its brand awareness off-line, ETrade has opened stand-alone investment centers in New York, San Francisco, Beverly Hills, Boston and Denver, and plans to open at least 20 more.
“We will rely on a few bricks and lots of clicks,” Cotsakos said.
But the expansion is raising concerns about new risks for ETrade as well. “It’s becoming a more complicated company, and that means they are going to have be very careful about how they manage the different businesses,” Smith said.
The decision to introduce an ETrade credit card this year is particularly risky, some analysts say.
Making unsecured loans to consumers is a perennial land mine for banks--a danger that has been underscored during the last six months by the heavy loan losses suffered by credit card issuers Providian Financial and NextCard, whose bank was shut down by federal regulators Friday.
Cotsakos said ETrade plans to avoid trouble by extending credit only to the “creme de la creme” of the 4 million households that have brokerage and banking accounts with the company.
Wall Street’s wariness about ETrade’s expansion plans is evident in the company’s shares: The stock, which peaked at a split-adjusted $72.25 in 1999 when it was soaring with other dot-com shares, closed at $9.05 Friday on the New York Stock Exchange. It has rebounded from less than $5 in late September but has traded mostly between $6 and $13 since January 2000.
On average, analysts surveyed by Thomson Financial/IBES expect ETrade to earn 44 cents a share in 2002 from continuing operations. At Friday’s share price, the stock’s price-to-earnings ratio based on the 2002 estimate is 21.
By comparison, the market is affording ETrade rivals Charles Schwab and Ameritrade Holdings significantly higher P/Es: Both of those stocks are priced at 31 times the companies’ respective 2002 estimated per-share earnings, according to Thomson Financial/IBES.
ETrade’s share price has been under pressure in recent weeks as Japan’s Softbank Corp.--once ETrade’s biggest backer--has sold more than half its remaining stake in the firm.
Softbank, which has been pulling back from its once-extensive Internet-related investments and is attempting to pare down debt, said it sold 18 million ETrade shares Jan. 30 at $8.80 apiece. The Japanese company retains about 15 million shares.
If Softbank is pulling away from ETrade, Cotsakos is personally betting on his strategy: In 2001, he bought 2.34 million shares of ETrade stock for $12.7 million, or an average of $5.45 a share, according to Thomson Financial/First Call.
The skeptics don’t bother Cotsakos because he still remembers the days when the industry questioned ETrade’s staying power as an online broker.
“There were a lot of people who didn’t think we would survive 60 days, let alone six years,” Cotsakos said. “We have always tried to stay ahead of the curve, in good times and bad times.”
