Among '96 Internet Stars, E-Trade Shines Brightest

A year since its initial public offering, E-Trade Group has emerged as the valedictorian of the Internet Class of 1996.

The on-line brokerage was one of about two dozen companies that went public last year amid a frenzy of enthusiasm for anything with an Internet or electronic commerce spin.

The bubble quickly burst for many of them, notably Cybercash Inc. and Security First Network Bank, though even these have made up some ground in the stock market's sustained advance.

None, however, have equaled E-Trade, a Palo Alto, Calif., company that combines discount pricing with a growing array of information services and order-execution options.

"It is larger than life right now in some respects, just because it has been so successful," said Bill Burnham, electronic commerce analyst at Piper Jaffray Inc. in Minneapolis. "Those guys have delivered."

They let customers do trades for as little as $14.95. Six out of 10 E- Trade transactions are conducted over the Internet, the rest via telephone or direct dial computer connection. Eighty-five percent of the stock trades are completed without human intervention.

E-Trade has rapidly carved a niche in a market that Piper Jaffray estimates will generate $2.2 billion in commissions by 2001.

Piper Jaffray said E-Trade is tied in share of daily Internet trades with Fidelity Investments, at 13%. Both are still well behind Charles Schwab & Co.'s 35%.

Given its pioneering accomplishments, E-Trade may offer valuable-and cautionary-lessons to other financial institutions considering how to pursue Internet opportunities.

The competition can be treacherous, both in numbers of companies and what they charge. Beginning with its discount brokerage base of 4.4 million customers, Charles Schwab is generating 34,000 daily trades through its on- line service. It also offers on-line checking accounts and bill payments.

Fidelity just reduced its fee for trades of under 1,000 shares to $28.95.

E-Trade has enrolled 200,000 accounts, and they initiate 12,000 trades a day. Revenues increased 121% in the fiscal year that ended last September, to $51.6 million, and should grow another 145% this year, Mr. Burnham said.

The company went public Aug. 16, 1996, at $10.50. On the first business day of 1997 it was only up to $11.25, but it has since risen nearly 150%. E-Trade shares closed Friday at TKTK, up TKTK.

Share-buyers are paying as much as 100 times forward earnings. The average per-share multiple for the Standard & Poor's 500 is 23.

"Investors are looking at it as a momentum play and are paying up for future earnings," Mr. Burnham said.

In a secondary offering last week, led by Robertson Stephens & Co., San Francisco, 8.1 million E-Trade shares sold for $27.50, raising $222.8 million.

Mr. Burnham said the company may use the infusion as additional reserves for its self-clearing operation, or it may buy out the E-Trade franchise in Canada.

Mr. Burnham also sees the company trying to diversify its products and get direct access to the payment system, perhaps by buying a thrift institution. "All the monoline (credit card) companies have thrifts and they are great vehicles to offer any kind of banking product," he said.

E-Trade recently hooked up with a bank-owned transaction processing company to enable clients to move money electronically between their personal checking accounts and E-Trade brokerage accounts. The system, called VirtualPay, is provided by National Processing Inc. of Louisville, Ky., a subsidiary of Cleveland-based National City Corp.

E-Trade was also one of the first few financial service companies-aside from the credit card organizations with their Secure Electronic Transactions framework-to strike a deal with Verisign Inc. to use digital certificates as a means of customer authentication.

Mark Wolfenberger, analyst at Deutsche Morgan Grenfell, whose company participated in E-Trade's secondary offering, has raised his yearend share price target to $35, from $30, based on a new 1998 earnings estimate of 66 cents a share.

Mr. Wolfenberger said overall stock market trading this summer is up 38% from a year earlier. He anticipates E-Trade will process about a million trades this quarter, up from his previous estimate of 910,000.

Because of the "quiet period" surrounding E-Trade's recent offering, company officials were not available to comment last week.

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