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Investment Overview for Ameritrade (NASDAQ:AMTD)
Below are key drivers of Ameritrade's value that present opportunities for upside or downside to the current Trefis price estimate for Ameritrade:
Interest on Money Market Balances
- Client Money Market Balances: Money Market Deposit Accounts (MMDAs) are like savings bank accounts where clients deposit money and in return earn a high rate of interest on it. Ameritrade's Client Money Market Balances have grown rapidly from $9.3 billion in 2006 to $61 billion in 2012, largely because of Ameritrade's strategy to migrate all client assets to MMDAs. With MMDAs gaining popularity among retail investors, we currently estimate that the figure could reach $67 billion by the end of the Trefis forecast period. There could be a potential 5% upside to our price estimate if the figure reaches $90 billion by 2019.
- Net Interest Yield on Client Money Market Account Balances: The yield for Ameritrade was on an upward trend until late 2008, rising from 3.43% in 2006 to 3.90% in 2008 - when the interest rate environment started to deteriorate. The low interest rate environment continued through 2012, resulting in yields of 1.67% in 2010, 1.52% in 2011 and 1.36% in 2012. We believe that interest rates now have very little room for falling further. 2013 may be th year after which the Fed starts increase interest rates.
For additional details, select a driver above or select a division from the interactive Trefis split for Ameritrade at the top of the page.
Ameritrade is an online brokerage that allows individual investors to trade equities, options and other securities in the market. Ameritrade also offers money market account services and investment services wherein client assets are invested in money market mutual funds, other mutual funds and company programs such as AdvisorDirect and Amerivest TM. Ameritrade earns a fee in return for its services, which is a percentage of the client asset balances.
The most valuable part of Ameritrade's business is the net interest the company earns on client assets. In higher interest rate environments, Ameritrade is able to generate more net interest income than it does via trading commissions.
High interest yield on large client balances
A large portion of Ameritrade's interesting earning client assets are allocated to money market accounts. Ameritrade has more than $60 billion worth of balances in money market accounts on which it earns a net interest yield of about 1.4%. Furthermore, Ameritrade has $15 billion of interest earning assets on which it earns a net interest yield of about 3.0%.
Falling trading commissions
With 5.8 million brokerage accounts, Ameritrade is one of the leading online brokerage firms. We estimate that Ameritrade earns on average $12.26 per trade. This average trading commission figure has declined in recent years and we expect the decline to continue as online brokerages compete to attract new clients with lower trading commissions.
Declining trading commissions
Trading commissions (fee per trade) across online brokerages have been declining. Some brokerage service providers offer a number of free trades which puts further pressure on industry commissions. Ameritrade has among the highest commissions in the online brokerage industry, and accordingly we expect its commissions to decline over the long-term.
Money market accounts becoming a key source of value
Ameritrade's money market account balances have grown from under $10 billion in 2006 to more than $60 billion in 2012. As a result, Ameritrade is earning significantly more in fees from money market accounts than it did in the past. We expect this trend to continue, resulting in a large part of Ameritrade's value coming from money market accounts.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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