The Factors Behind E-Trade’s Massive Stock Rally This Year

51.75
Trefis
ETFC: E*TRADE Financial logo
ETFC
E*TRADE Financial

E*Trade Financial (NASDAQ:ETFC) has fared well in 2017, with over 20% growth in revenue in the first 9 months of the year and a 43% surge in its stock price since the beginning of the year. We attribute this growth primarily to revenues from interest earning assets. This segment has continued its strong performance throughout the year, in large part due to the rate hikes over recent months and the expectation of further interest rate hikes in the year ahead. However, the year has not been without challenges. There has been an industry-wide decline in trading commissions, and the company was forced to slash its commissions earlier in the year, owing to stiff competition from traditional and discount brokerages.  Still, the acquisition of OptionsHouse in the second half of 2016 offered some respite as it led to a significant rise in trading volumes. We expect the company’s recent foray into bitcoin futures to boost the trading commission for the brokerage in the year ahead. Below we take a look at what has driven the rally in the company’s stock, and what to expect looking ahead.

Fed Rate Hikes Propelled Interest Earning Revenues 

E-Trade saw 21% growth in interest earning assets and 24% growth in revenues from these assets for the first three quarters of the year. The Federal Reserve’s rate hikes contributed to this surge in assets. Additionally, the company has the highest yield on its interest earning assets (at 2.8%) in comparison to its competitors, which has contributed to impressive growth in revenues. This segment has continued to be a major source of revenue for the company, contributing around 62% of overall revenue. With the likelihood of further rate hikes, we expect continued growth in revenues from the segment in the near term.

Relevant Articles
  1. Coronavirus Recovery Watch: Capital Market Portfolio: 15% 5D Return vs. (-25%) YTD Return – [BlackRock, E*TRADE, Schwab & TD Ameritrade]
  2. Why Isn’t Charles Schwab’s Stock Benefiting From The Spike In Trading Volumes?
  3. E*TRADE: Will Lower Trading Commissions Cause Revenues To Be Short Of Consensus Estimates For FY 2019
  4. Is E*TRADE Stock Fairly Priced?
  5. Net Interest Revenue Will Form 40%, 60% or 80% Of E-Trade’s Stock In 2020?
  6. Changing Business Environment Likely To Be A Boon For Schwab and Ameritrade Despite Zero Commissions

OptionsHouse Has Helped To Offset Losses From Cut In Trading Commissions

Despite a 33% gain in trading volumes, E-Trade saw a mere 4% gain in trading commissions through the third quarter. This is primarily due to the company’s decision to slash its commissions per trade by over 30% since March. The acquisition of OptionsHouse in mid-2016 continued to contribute to growth in brokerage accounts and derivative trading volumes, with over 31% of trading volumes attributed to derivatives. Strong growth in trading volumes in October and November (+15% y-o-y) should offer a significant boost to its top line in the current quarter.

Bitcoin Demand Suggests A Positive Growth Outlook

E-Trade has recently launched bitcoin futures trading on its platform. With this, the company is looking to get an early movers’ advantage in the volatile but fast-growing asset class. Introducing bitcoin futures on well-established brokerages exposes the currency to a larger pool of traders and investors, which could drive further demand for the currency and volumes for brokerages. Over the long run, this could provide a healthy boost to E-Trade’s trading volumes.

We have a price estimate for E-Trade’s stock of about $43, which is slightly below the market price.

See Our Complete Analysis For E-Trade Here

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research