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2HRS2GO: E-Loan is good -- but narrow

Given the companies involved with E-Loan Inc. (Nasdaq: EELN), the company's IPO success should surprise no one.

Shares of the online mortgage provider shot up as much as 164 percent in their public trading debut today. In today's unrealistic market, that's the kind of performance investors have come to expect from IPOs led by a Wall Street stud like Goldman Sachs. Having large investors such as Benchmark Capital and Softbank -- which happens to own Ziff-Davis Inc. -- certainly helps too. (Softbank definitely helped E-Loan co-founders Chris Larsen and Janina Pawlowski, in the form of loans totaling $5.5 million and $4.8 million, respectively)

Getting the right players behind you means more than anything else to an IPO's first day performance, but I'd like to believe that those backers wouldn't have come aboard in the first place unless the business is solid. The Internet offers an ideal medium for mortgage shopping, and E-Loan's service does it credit (puns are always intended) -- the website is easy to navigate, quick to return results, and at least some bits of anecdotal evidence seem to indicate people are happy with the customer service.

Top and bottom line numbers remain typical for a young Internet company. Sequential revenue growth for the last four quarters reported has been 134 percent, 66.3 percent, 47.3 percent and 59 percent, while losses rack up, including $11.4 million, or 146.4 percent of revenue, in the first quarter of this year. The company expects deficits to continue for the foreeseeable future, continued investments, blah blah blah...

So the performance has been adequate so far. But is there an independent future for an online mortgage specialist?



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The service might be better packaged on the Web as part of a financial suite, a la Intuit's Quicken website, which claims more than $1 billion in loans closed. E-Loan has handled about $1.3 billion in loans over the last five quarters.

E-Loan sort of presents itself within a larger financial offering, through partnerships with Yahoo!, E*Trade and DLJDirect. Distribution deals accounted for as much as 22 percent of E-Loan's business in the first quarter; but that's not the same as full-fledged integration.

A look at E-Loan's competition illustrates the problem. The company has made its name offering loans at lower prices by cutting out middleman agents, but that savings advantage will be eroded as more banks offer their own mortgages directly over the Web. E-Loan's own prospectus notes Banc America, Wells Fargo and Norwest already have started hawking their own wares online. And they can leverage current customer relationships, much as Intuit does with Quicken.

Word on the Street has many investors playing E-Loan as an acquisition target, because it would be such a quality addition to some financial services portfolio. But consider that the barriers to entry are relatively low in this business. Aggregating and building comparison databases for mortgages involves hard work, but it's not as complex as, say, online retailing, which requires efficient warehousing and distribution system.

Buying E-Loan wouldn't even give the acquirer a true national presence. More than two-thirds of E-Loan's revenue comes from loans in one state, California; the Bay Area and Silicon Valley account for 42 percent of the company's business. E-Loan doesn't expect its Calicentricity to change anytime soon. "California consumers are more likely to be comfortable with using the Internet to purchase mortgages," E-Loan notes in its IPO prospectus.

Today's market is valuing E-Loan at almost $1.5 billion. Even by current standards, that's an outrageous price to pay for something a large financial firm could build itself.

Other issues:

  • Apple Computer Co.
  • (Nasdaq: AAPL) While watching a video on E-Loan's website, the thought occurred to me: Maybe Apple should take Quicktime public.

    In using it to watch not only E-Loan's video but also various Star Wars trailers and advertisements, I've come to the conclusion that Quicktime 4.0 rocks. At least it does if you have broadband Internet access and a sufficiently powerful PC.

    The idea of spinning out Quicktime isn't new, it's been floated before. But now might be the time, with the market starving for big-name IPO candidates. I don't know what kind of revenues or profits (if any) Quicktime produces, but who cares? At this point it's an Internet play, and one with a highly-regarded name and arguably best-of-breed status in its niche, so no one will worry about finances.

  • Compaq Computer Corp.
  • (NYSE: CPQ) So this time the company's board wants strings attached to the next chief executive.

    Gregory Brenneman, president of Continental Airlines, bailed out of Compaq's CEO sweepstakes because he wasn't guaranteed full control, says the Wall Street Journal. As the newspaper notes, Benjamin Rosen likes to take a very active role as Compaq's chairman.

    But top CEOs always want to be their own bosses. Why would you want to be second-guessed by the same board that oversaw the company's decline? Institutional memory has its place, but in the case of a mess like Compaq, the memories for the last several years have been mostly of mistakes.

    Compaq needs to clear past debris so its new leader can rebuild the company with a clean floor. Rosen should agree to step aside as chairman once the board chooses Eckhard Pfeiffer's replacement.

    The overall technology market remained in positive territory in mid-afternoon. With two hours left in regular trading, the Nasdaq Composite Index was up 18.18 to 2,620.62, the S&P 500 had risen 10.99, and the Dow Jones Industrial Average had gained 85.80 to 10,740.95. 22GO>