Ameritrade (NYSE:AMTD) recently made its performance metrics for the month of May public.  The one thing that stands out in the data is that the number of online revenue trades executed by Ameritrade’s clients has been declining each month since March this year. This is a discouraging sign, given that improving market conditions have provided investors with an overall bullish environment. Moreover, this period also saw significant macro-economic changes, including ongoing unrest in oil-producing countries and the Japanese disaster to name a few, which indicate ample opportunities for short-term trades.
This decline in trades for Ameritrade, which provides one of the most popular platforms for individual investors to trade equities, options and other securities, is hence perplexing. Ameritrade competes with other online brokerages and financial services firms like E-Trade (NASDAQ:ETFC), Charles Schwab (NYSE:SCHW), Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC) online services.
Our price estimate for Ameritrade stock is $22.71, implying a premium to market price.
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This marks a reduction in Ameritrade’s trading commission revenues…
Ameritrade reported 378,000 client trades per day on an average in May, 6% lower than the 402,000 trades per day reported for April. ((TD Ameritrade Reports Monthly Metrics, Ameritrade Press Releases, May 10 2011)) Also, the company had reported an average of 439,000 trades per day for the first quarter of 2011, while the figure was 453,000 for the first 2 months.  This indicates about 411,000 trades per day for March. The decline in the number of trades has hence been a trend for the past 3 months.
This will no doubt impact the number of revenue trades for Ameritrade in this quarter, and consequently for the year. With competitive pressures already lowering the revenue for Ameritrade per trade, the company could see a significant drop in revenue.
… which in turn could significantly reduce Ameritrade’s stock value
Trading commissions contribute to just about one-third of Ameritrade’s value according to our analysis. The impact of a reduction in number of trades on the company’s stock price can be understood by the fact that even if this number remains at its 2010 value of 11.6 million and sees no growth, then there would be a 5% downside to our $22.71 price estimate.Notes: