) is a financial services company that provides online brokerage
and related services to individual retail investors under the
E*TRADE Financial brand. The company also provides investor-focused
banking products to retail investors. It competes with firms like
Charles Schwab Corporation
), Ameritrade (
) and Bank of America (
We have a
$16.88 price estimate for E-Trade stock
, roughly in line with market price.
Understanding E-Trade's Biggest Source of Value
Contrary to popular belief, revenues earned by online brokerage
firms per trade carried out by their customers is not their biggest
source of value. These firms earn a bulk of their revenues in the
form of interest on the assets they hold - which include
mortgage-backed securities, investment securities and even loans.
Our estimates show that the net interest earned on assets
contributes to almost two-thirds of E-Trade's value.
Below we highlight scenarios for our E-Trade price estimate
under a scenario of sluggish global economic recovery.
10% Downside: E-Trade's Interest Earning Assets Grow at a
Loans, mortgage-backed securities and investment securities
constitute the majority of E-Trade's interest earning assets. These
assets were at their peak in 2007, and were worth more than $56
billion. However, this total value dropped to $40 billion in 2010
because of the global economic downturn.
We currently forecast a 5% annual growth in these assets for the
years to come. However, if growth instead hits a more moderate
annual pace of 2%, these assets would reach $46 billion by the end
of our forecast period - representing a downside of 10% to our
$16.88 price estimate.
8% Downside: E-Trade's Net Interest Yield on Loans,
Deposits & Securities Improves
This yield has typically been around 3% for E-Trade, with the
value being 2.97% in 2010. We currently forecast the interest rates
to improve to allow E-Trade net yields of 4% over the next 5
If interest rates do not improve quickly enough, the yield may
only reach 3.5% by the end of the same period. This represents a
downside of 8% to our $16.88 price estimate.
See our full analysis and $16.88 price estimate for