Fool.com: Online Brokers Fall on Bearish Analyst Comments (News) August 3, 1999

Online Brokers Fall on Bearish Analyst Comments

August 3, 1999

Online discount brokers were beaten up today, with the stocks of E*Trade (Nasdaq: EGRP), Ameritrade (Nasdaq: AMTD), Schwab (NYSE: SCH), and National Discount Brokers (NYSE: NDB) all off about 10% this afternoon following the release of a research report by Credit Suisse First Boston's Bill Burnham suggesting that Q3 may be the first period in several years in which sequential trading volumes fall, taking with them all-important commission revenues.

Burnham puts together his widely anticipated report by piecing together trading data in stocks widely trafficked in by online investors, as well as the shares of the actual brokerages. "July share volumes in our tracking group of Internet/high-tech stocks fell 54% versus April 1999," wrote Burnham. "This is clearly a short-term negative for the group. We don't expect a recovery until late September or mid-October."

Meanwhile, the Inter@ctive Week Internet Index has lost ground all summer -- its value and trading volume have slid steadily from April highs.

The report hit the market with a bang, but investors with their ears to the ground could have heard the rumblings late last month when the aforementioned companies reported earnings. E*Trade said then that fiscal Q3 (ended June 30) daily average trade growth slowed significantly, while both it and Schwab hinted that margins were coming under pressure because of higher expenses associated with staffing and marketing.

This kind of phenomenon isn't surprising, particularly in the Web wars, where advertising and staffing expenses typically expand exponentially -- often outpacing revenue growth. But in combination, those two factors can be a pretty bitter pill for investors to swallow, particularly as there are indications that there is more seasonality and sensitivity to market trends with regard to online trading habits than the booming sequential numbers we've come to expect let on.

But for online services companies, which frequently come under fire when customer service can't keep up with demand -- as users of America Online (NYSE: AOL), on-again-off-again auctioneer eBay (Nasdaq: EBAY), and pretty much every online discount brokerage could have told you at different times in recent years -- a temporary lessening of user pressure shouldn't be taken as an indication that they can cut back. As such, look for margins to continue to come under fire for quarters to come.

Not that investors should cry too many tears for those with money in this sector, many of whom have made a nifty chunk of cash over the past year.

So, where to from here? One way to trim costs, naturally, is to buy out competitors, quickly scaling up business and removing a voice from the advertising din. Many market watchers believe E*Trade is the company most likely to use its stock, still pretty much a double this year, to take out some of the competition.

By Dave Marino-Nachison (TMF Braden) (TMF Braden)

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