The Company provides internet-based options, stock, bond, mutual fund and futures brokerage services to retail customers located throughout the United States and certain foreign countries.
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This is a business generating a high ROE with the ability to grow. Option trading has been growing relatively quickly in recent history and should continue to experience growth due to low penetration and frequent airtime on investing shows, often being explained as portfolio insurance. I expect this company to experience a good portion of this growth due to their advanced platform and functions.
This being said I am concerned about a few aspects of the company; first and foremost their cost for customer acquisition(cost it takes to get someone using their product) has expanded rapidly. This will make future expansion more expensive and says either there is increased competitive pressures or their target audience is largely already onboard. There is some credence to the second arguement as options trades as a percentage of the total and the number of trades per account has diminished(options traders will tend to trade more as when an option expires a new purchase must be made in order to stay invested), which may mean they are attracting outside their target demographic. I expect there is a combination of both factors. Also I am concerned slightly by their acquisitive nature. A number of acquisitions have seemed to be beneficial but I am unsure about their educational segment, as it has yet to be profitable. The idea of combining the company with an options education service seems intelligent as its easy to cross sell each customer the other product(an education customer the brokerage platform and vice versa) but its results are still ambiguous. It may also be that this service is more a loss leader, helping bring more profit to the brokerage segment but their strategy is uncertain at this time.
Simply put I see this as a good investment as it has a compelling valuation at today's pricing. Due to lower interest rates, net interest earned on customer accounts has decreased leading to temporarily lower earnings. In a normal environment I can easily see this company at around $1.50 in EPS giving them a PE of about 10. Considering potential earnings growth and their strong balance sheet it seems the bar is low enough for an easy outperform.