Skip to Content
Stock Analyst Update

E-Trade Matches Peers' Reductions in Commissions

We're reducing fair value estimate for the narrow-moat firm.

Mentioned: , ,

On the morning of Oct. 3, narrow-moat E-Trade (ETFC) became the next major online brokerage to announce it will be reducing trading commissions on U.S.-listed stock, ETF, and option trades to $0. This decision is undoubtedly a defensive move to maintain market share against larger rivals that made similar announcements this week, particularly wide-moat Charles Schwab (SCHW) and narrow-moat TD Ameritrade (AMTD). While we recognize that E-Trade needed to make this decision to maintain share, we think the industry is worse off because of this move. All the major players in the online brokerage industry reduced fees simultaneously and to a similar extent, so each firm reduced its revenue stream without improving its relative competitive position. We are reducing our fair value estimate for E-Trade to $46.50 from $54.50 and believe that while the market is overly pessimistic on E-Trade and other online brokerages, it is now materially more difficult for E-Trade to meet its $7 earnings per share goal.

E-Trade’s plan to essentially double 2018’s earnings per share by 2023 ($3.88 per share versus an anticipated $7 per share) is looking increasingly difficult to achieve. We estimate E-trade’s move to reduce trading commissions will reduce annual income by about 9% in 2020 and because this is a fixed-cost business, we anticipate this forgone revenue will meaningfully reduce net income. Further, when the company unveiled their plan in late 2018, macroeconomic factors appeared to be a tailwind for E-Trade with increasing interest rates and a strong U.S. economy. Now, long-term yields are nearly the lowest we have seen since 2016 and concerns about the U.S. economy continue to build.

Given the expense synergies in the brokerage business, we think the probability of E-Trade being purchased by a larger entity has increased since last week.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Michael Wong does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.