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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 interest on it. Ameritrade's Client Money Market Balances have grown rapidly from $9.3 billion in 2006 to $77 billion in 2015, largely because of Ameritrade's strategy to migrate all client assets to MMDAs. And with MMDAs gaining popularity among retail investors, we currently estimate that the figure could reach $103 billion by the end of 2023.
- 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 2013, resulting in yields of 1.67% in 2010, 1.52% in 2011, 1.36% in 2012, 1.15% in 2013, 1.11% in 2014, and 1.09% in 2015. We expect that interest rates will begin to rise in 2016, with a rate hike from Fed in 2015 end and a possible hike in 2017 .
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 interest earning client assets are allocated to money market accounts. Ameritrade has more than $79 billion worth of balances in money market accounts on which it currently earns a net interest yield of about 1.14%. Furthermore, Ameritrade has $21 billion of interest earning assets on which it earns a net interest yield of around 3%.
With almost 7 million brokerage accounts, Ameritrade is one of the leading online brokerage firms. We estimate that Ameritrade earns on average about $11.70 per trade. The average trading commission figure declined in the recession years from 13.48 in 2009 to $12.27 in 2013, but picked up for a brief period, only to decline again in 2015 and 2016. With improvement in macro conditions, we expect the commissions to pick up in future.
Trading commissions to pick up slightly
Trading commissions (fee per trade) across online brokerages have been declining. However, with the increasing mix of derivatives trading, average commissions are likely to pick up.
Money market accounts becoming a key source of value
Ameritrade's money market account balances have grown from under $10 billion in 2006 to almost $77 billion in 2015. 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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