Falling DARTs Create a Headwind for E-Trade

E-Trade ( ETFC ) recently announced its performance metrics for the month of April. The report revealed an almost 4% decline in the number of daily average revenue trades (DARTs) for the month. This represents a significant decline over the past 2 months, with DARTs falling from 185,717 in February to 160,907 in April - a 13% slide over the period. E-Trade 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 (NYSE:SCHW), Ameritrade ( AMTD ), Wells Fargo (NYSE:WFC) and Bank of America ( BAC ).

We maintain a $16.88 price estimate for E-Trade stock , implying a premium to market price.

Reduction in DARTs Implies a Drop in Revenues…

Heavy competition in the online brokerage industry has already sparked price battles, as companies cut down on the commissions they earn per trade. This has resulted in online brokerages earning less per trade. E-Trade's revenue per trade has already fallen from $11.38 per trade in Q1 2009 to $11.32 per trade in Q1 2010. And the trend is expected to continue in the future with little differentiation among the more prominent companies in the market.

And a reduction in the number of revenue trades means revenue figures will shrink further in the near future. This notably adds to reduced trading activity among investors, brought on by reduced market volatility from the normalization in global equity markets after the economic downturn of 2008.

… Which in Turn Hinders E-Trade's Value

We have used the average number of revenue trades per active account carried out annually by E-Trade's customers in our analysis of the company. We currently forecast a 4% annual growth in the number of revenue trades. But even if the number of trades remain at their value in 2010 of 14.1 trades per account, it would represent a 5% downside to our $16.88 price estimate.

See our full analysis for E-Trade stock here

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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