A “Social” Cause: E-Trade Social Networking Platform Spells Stock Upside

April 6th, 2011 by Trefis Team
51.75
Trefis
ETFC: E*TRADE Financial logo
ETFC
E*TRADE Financial

E-Trade (NASDAQ:ETFC) seems to have a finger on the pulse of its customers. That would explain the launch of the E*TRADE Community – the latest attempt by an online brokerage firm to harness the power of social networking for investors to “connect with each other, share ideas, and validate their investment strategies”. [1] With many casual and retail investors preferring peer outlooks to analyst reports while making their investment decisions, this move can go a long way for E-Trade in attracting new customers. While Charles Schwab Corporation (NYSE:SCHW) incorporated community features in 2008, whether competing online brokerages Ameritrade (NYSE:AMTD) and Fidelity will follow suit with new feature launches remains to be seen. [2]

We have a $18.14 price estimate for E-Trade stock, a premium of about 15% to market price.

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E*TRADE Community: The What and Why

E-Trade’s new community feature is being provided to all retail investors that have an online brokerage account with the company. Just like other social networking websites, the platform allows investors to join as a member and create an online profile – although people with brokerage accounts can access the discussions in the community space without having to specifically join as a member.

Members can provide their own opinions, understand the overall sentiment regarding individual stocks, and even see which stocks a particular investor has traded over a period of time. E-Trade also claims that personal information about individual investors (including names and account details) are adequately protected.

The Potential Upside for E-Trade’s Stock is Significant

Online brokerage firms are not very well differentiated. In the recent past, competition has been fierce on commissions & fees, types of investment products offered, research & advice for investors, and customer service. And the technology has been largely the same for all of them, with brokerages offering similar interfaces for trading using a computer or mobile phone.

But community options may set E-Trade apart in the near future, with more retail investors wanting to leverage opportunities and insights distributed through social networks. E-Trade had about 2.7 million active brokerage accounts at the end of 2010, a number dwarfed by the 8 million active brokerage accounts that each of its competitors Schwab and Ameritrade had.

We currently project that E-Trade could grow its total number of brokerage accounts by about 3% annually. But if the social-networking platform does take-off, growth could be as high as 10% annually, given the huge amount of churn among online brokerage firms. In this scenario, the number of brokerage accounts would nearly double in the next 5 years and represent an almost 10% upside to our $18.14 price estimate, pushing our number close to $20.

See our full analysis and $18.14 price estimate for E-Trade

Notes:
  1. E-Trade launches online investment community, E-Trade News, March 14 2011 [↩]
  2. Charles Schwab Launches Virtual Community for Active Traders, Wall Street & Technology, July 29 2008 [↩]