Sector Spotlight: Some 'Enabler' E-Finance Stocks Still Blooming

With earnings concerns and a troubled stock market taking their toll on Internet and financial stocks, it may be surprising to find a small group of e-finance stocks holding their own.

These e-finance infrastructure stocks are doing better than consumer-based online finance stocks like E-Loan (EELN), NetBank (NTBK), E*Trade (EGRP) and NextCard (NXCD), which despite having been heralded as revolutionizing the financial industry have seen their stocks crumble in the past few months. But Wall Street has become increasingly interested in e-finance companies often known as the "enablers," primarily Digital Insight (DGIN) and Corillian (CORI).

These companies may not be as dysfunctional as the term enabler suggests. Basically, they provide software and services to financial companies, mainly banks, that want to outsource, start or upgrade their online banking sites. Since these infrastructure companies sell their products to businesses rather than consumers, their stocks have far outpaced many of their e-finance counterparts during the past three months.

Outpacing

Corillian, which targets large financial institutions that want to buy and modify software, has seen its stock gain 63% since Sept. 1, and it's up 66% from its $8 IPO on April 12. Digital Insight, which provides online services that small banks and lending institutions then offer to their customers, is down 7% from Sept. 1 and off 33% since the beginning of the year. They compare favorably to the likes of E*Trade, which is off 48% for the year and 23% since Sept. 1, and even the Nasdaq Composite Index, which is down about 18% this year and 22% since Sept. 1. A third company which hasn't held up nearly as well under the scrutiny on Wall Street is S1 (SONE) -- its stock is off 90% since the end of the year and off 60% since September.

Those mixed results show that doubts remain about these companies, chief among them whether the adoption rate among customers is fast enough. But Jim Fowler, research director at Thomas Weisel Partners, believes banks have little choice now but to move toward online product offerings. They're losing their hold on customer assets thanks to increased competition from brokerages and other financial services companies, forcing them to change.

"I think the reason why [online banking] hasn't worked up to this point is that when bankers looked at companies like Telebanc and NetBank, they realized those banks would never take their customers," Fowler says. "Now the world is a little different. Looking at the Fed funds data, it's clear that banks are losing deposits to brokerages and insurance companies."

He figures banks will react to this pressure over the next 18 months by outsourcing the task to the e-finance infrastructure companies. And Jupiter Research recently estimated that 13.1 million households will participate in online banking this year and 18 million next year.

Avoiding 'A Call'

Unlike some of the other e-finance companies, investing in Digital Insight or Corillian doesn't require an investor to "make a call" about the direction of online financial services, explains Matt Vetto, an analyst at Salomon Smith Barney. All that matters is that there will be online banking, which differs from buying a stock like E-Loan, in which an investor has to believe that consumers want to sign up for loans from a third-party lender.

"These guys are more agnostic. It's not a bet on knowing exactly how the world plays out," says Vetto. "This is a broader bet on online banking." (Salomon hasn't done any underwriting for either company.)

Given all this, big name Wall Street firms like Salomon and Goldman Sachs are picking up coverage of these stocks. But since questions remain -- and since these companies still lose money -- the coverage hasn't all been positive. Since Sept. 1, for instance, three analysts have started covering Digital Insight with buy ratings, while Corillian has added coverage from four analysts, two of whom rated it a hold. Wall Street coverage of a stock can lead to broader institutional ownership, which in turn can attract other investors.

So Wall Street is paying attention. Now it's up to the companies to perform.

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