Key Growth Areas For Ameritrade; October Metrics In Focus

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Brokerage firm TD Ameritrade (NYSE:AMTD) reported a sustained period of higher trade volumes in the latter half of its fiscal 2015 ended September. Average daily trade volumes were up by 8% and 19% on a y-o-y basis for the quarters ended June and September, respectively. Consequently, the revenues generated by Ameritrade through trading commissions also rose by 3% and 10% over the prior year period through the two quarters. However, the company has struggled to sustain the rise in trade volumes in Q1’16 thus far. Ameritrade reported monthly metrics for October, with volumes falling both on a sequential and annual basis. On the other hand, Ameritrade reported a solid increase in its total client asset base for October after a slight slowdown in August and September.

We have a $34 price estimate for Ameritrade’s stock, which slightly lower than the current market price. Ameritrade’s stock price has risen by almost 20% since the beginning of the December quarter.

See our full analysis for TD Ameritrade

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Transaction Based Revenue Rises With Increased Volume

Ameritrade’s average trades per day rose by 8% y-o-y to 462,000 in FY 2015, at a robust “activity rate” of 7.1%, resulting in higher transaction based revenues for the company. [1] Ameritrade defines activity rate as the average number of trades per day divided by the total number of funded accounts at the brokerage. However, this was offset slightly by a lower average transaction fee per trade of 12.09, a 5% drop from a year ago period. The drop was essential for the company to maintain its market share in the face of rising competition from low-fee brokerage firms and potential threats from zero-fee brokerage apps. The company expects the trend to continue with lower transaction fees per trade through fiscal 2016. [2] We currently forecast the figure to drop to about $12.30 in 2015 from $12.60 last year.

However, the brokerage witnessed a drop in trade volumes in October, with its average trades per day dropping to 437,000. Volumes were about 12% lower on a y-o-y basis, but roughly flat over the previous month. The annual dip was largely due to a surge in trade volumes in October last year, so this isn’t a big cause for concern for Ameritrade. October volumes are only about 3% lower than the average trades per day through the December quarter last year. Moreover, tools like in-app chat and platform sharing settings have been made accessible to customers in an attempt to give a boost to mobile trades. Mobile trades constituted about 16% of total daily average revenue trades (DARTs) through fiscal 2015, with total mobile trades rising by 50% y-o-y in Q4’15. [3] If Ameritrade can sustain the average trade volumes at October levels through the December quarter, it would imply an average of about 17 annualized trades per account. We currently forecast the average annual trades per account to stand at 17.9 for 2015. We subsequently forecast the annual trades per account to gradually rise about 20 through the end of our forecast period, as macroeconomic conditions improve and the company leverages newer technologies on its platforms.

Asset Base Increases With Interest Rates Likely To Pick Up

Ameritrade witnessed a strong rise in both its fee-based and spread-based client asset base through FY 2015. Ameritrade’s spread-based assets – which include both insured deposit accounts (IDA) balances and interest-earning assets – were up by about 5% through fiscal 2015 to $95.9 billion. Interest-earning assets rose by 9% for the full year to $20.2 billion. However, low interest rates led to lower yields, resulting in limited revenue growth. The company has sustained growth in interest-earning assets, with the asset base rising to $22.4 billion in October – about 15% higher on a y-o-y basis. If interest rates pick up in December, it could lead to healthy revenue growth for the company.

Similarly, Ameritrade’s average IDA balances grew by 4% in fiscal 2015 to $75.7 billion. IDA balances stood at $80.4 billion in October, which was 6% higher in a y-o-y basis. We currently forecast IDA balances to gradually rise from about $79 billion in 2016 to over $85 billion by the end of our forecast period.

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Notes:
  1. Ameritrade Monthly Metrics, Ameritrade Investor Relations, November 2015 []
  2. Ameritrade’s Outlook Statement, Ameritrade Investor Relations, November 2015 []
  3. TD Ameritrade Q4 FY 2015 Earnings Call Transcript, Seeking Alpha, October 2015 []