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Another Internet Cliche Dies

Earnings announcements prove that not all Internet companies blew their money at the Super Bowl.

Another Internet cliche died last week, a Super one.

Earnings announcements from


(AMTD) - Get TD Ameritrade Holding Corporation Report




for the first three months of 2000 disproved the notion that all Internet companies blew the millions spent in advertising on the Super Bowl this year. The results, quite unexpectedly, showed that the big bets made in massive first-quarter advertising paid off in spades for both companies.

More broadly, this proves that many of the beaten-down, profit-free Internet companies weren't morons in steadfastly insisting that big short-term marketing expenses could lead to a long-term payoff. There are of course plenty of companies with little to show from this strategy --


comes to mind. And Internet stocks are getting hammered right now, largely because investors have come to fear their lavish spending habits. But this Internet business model seems to be working for some of the online brokers.

Six months ago, Wall Street was sticking its steely forks into the carcasses of the online brokerages.



was off 55% in the six months after its April 15 high, Ameritrade fell 63% in the same period, E*Trade 54%. Analysts with the mainline firms and professional money mangers said the party was over, with any number of threats at the door of the Internet outfits. With marketing expenses soaring, these companies saw customer-acquisition costs soar.

TheStreet Recommends

Ameritrade, most notoriously, spent $466 to get each new customer in the last three months of 1999. (Ameritrade and E*Trade are on fiscal years beginning Oct. 1.) These customers were bringing in revenues of only $178 each per quarter, according to

Chase H&Q

analyst Greg Smith.

Worry Zone

"Three-hundred fifty and above gets into the worry zone," says Smith (of the companies mentioned in this article, his firm has performed underwriting for only E*Trade). "And there were plenty of people worried."

That trend looked like it was going to get worse as the big boys like

Merrill Lynch


, the largest old-line brokerage, finally began entering the Internet business. And pundits were predicting that commissions costs could go all the way to zero. The online brokerages, it seemed, were toast, and emblematic of the future of Internet companies that dared to compete with bricks-and-mortar stalwarts.

While the Street was busy writing epitaphs for online brokerages in the form of damning analyst reports and sell orders, the online brokerages were busy writing huge marketing checks. Television ads sucked up millions in spending. Schwab hired

Atlanta Hawks


Dikembe Mutombo

to talk about long-term debt ratios. Ameritrade countered with a Super Bowl ad featuring the swimming return of every-parent's-nightmare


, the freak discount trader. (Stuart has appeared

here before.) E*Trade upped the ante, with a garish Super Bowl halftime show and some lucky sap with money coming out his wazoo.

Money Can Buy You Love
Customer-acquisition costs are falling again for the online brokers

Source: Chase H&Q analyst Greg Smith

The gamble worked. These ads ran as the


was recording record volume and new investors were rushing to participate in the market. The ads were like throwing gasoline on the Nasdaq fire -- the resulting flame was customer growth. In particular, E*Trade's accounts grew by 29.9% in the March quarter. Ameritrade saw its accounts surge 44.6%. And for both companies, the cost of adding those customers fell: 2.5% for E*Trade and an amazing 61.6% decline for Ameritrade.

"This quarter is showing that their brand-identity strength within the online trading world is very, very strong," says

Robertson Stephens

analyst Scott Appleby (an E*Trade underwriter, he has a buy rating on both it and Ameritrade). "And when it comes to market share, you're starting to find that the E*Trades of the world are de-coupling themselves from the rest of the pack."

Turning the Corner

E*Trade turned the biggest corner of them all. The company has turned the corner toward profitability, shocking analysts with a $1.3 million profit in the quarter, excluding gains and charges.

Years ago, E*Trade was a profitable company, but CEO Christos Cotsakos took on a high-risk strategy involving sinking a ton in marketing, deciding that it was better to lose money in the short-term for market-share gains in the long term. Traditionalists called it folly, but now it looks like Cotsakos was right.

"Now E*Trade is back in black," says H&Q's Smith, who raised his estimates for Ameritrade, E*Trade and Schwab, "and they say they're going to stay that way. With this market meltdown, these stocks are beat up in spite of these results. I'm telling people to buy 'em now, they're cheap."

And, in the long run, Smith hopes that may be the best trade of all.

Cory Johnson files weekly from's San Francisco Bureau. In keeping with TSC's editorial policy, he neither owns nor shorts individual stocks, although he owns shares of He also doesn't invest in hedge funds or other private investment partnerships. Johnson welcomes your feedback at

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