15% Upside to Ameritrade if Accounts Grow to 10 Million by 2013

Ameritrade (NYSE:AMTD) is an online brokerage that allows individual investors to trade equities and options as well as other securities and competes with E-Trade (NASDAQ:ETFC), Charles Schwab (NYSE:SCHW), Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC) online services. Ameritrade also offers money market account services wherein TD Bank USA makes available to clients of Ameritrade’s broker-dealer subsidiaries money market deposit accounts as designated sweep vehicles. Ameritrade also offers investment services wherein client assets are invested in money market mutual funds, other mutual funds and company programs.

Our price estimate for the company’s stock is $22.65 is about 10% higher its current market price.

What Differentiates Ameritrade from the Other Brokerages?

Online brokerage firms compete on various aspects including commissions & fees, types of investment products offered, research & advice for investors, and customer service. The awards and accolades for Ameritrade in the past show its strength in research and customer service. ^[1]

The biggest driving factor for an online brokerage’s trading commissions is the number of active trading accounts. As commissions are earned per transaction, more accounts used by investors actively for trading directly translates to more revenue. The number of brokerage accounts for Ameritrade have been increasing historically, from 6.3 million in 2006 to 8.0 million in 2010. Ameritrade’s acquisition of TD Waterhouse in 2006 led to accounts increasing from 3.7 million to 6.2 million.

Ameritrade allows individual investors to use its portal to make trades, and it charges its clients a commission per execution. Investors prefer an online brokerage that charges low commission and, at the same time, has secured and efficient transaction system.

We expect a recovering market and Ameritrade’s investment into marketing, brand-building and technology will lead to a steady increase in the number of brokerage accounts in the future. Moreover, as markets continue to recover from the lows witnessed during the global economic downturn, we expect more individual investors to return to markets. This should result in an increase in the number of clients.

The high volatility predicted in the market in the short run would also trigger more clients with high risk appetite who would want to try their hand at the market. We believe the number of active brokerage accounts with Ameritrade would grow to reach 8.9 million by 2013. If this grew to 10 million, this would tack on about 4% to our current estimates implying a potential total return of 15%.

1. Accolades, Ameritrade, 2011 [↩]