Online broker Web Street (Nasdaq: WEBS) goes public Wednesday with a reputation of catering to the hyperactive trader. Web Street will need every one of those traders to be a long-term hit on Wall Street.
Web Street priced its 3.5 million share offering at $11, the top of its $9 to $11 price range. Fahnestock & Co. is the lead underwriter with an assist from Pacific Crest. Neither underwriter is a powerhouse.
As for the timing, Web Street looks pretty good. Trading volume is up and some online brokers are back in favor on Wall Street. Web Street could definitely be a one-day wonder.
After that first day though, investors may be the ones wondering about Web Street.
Web Street: Can it compete?
For the record, Web Street is a relatively solid brokerage and is ranked 15th among e-brokers, according to Gomez Advisors, an e-commerce research firm. In a review, Gomez said Web Street said is best suited for the hyperactive trader. That's not a bad niche considering there are a lot of hyperactive traders out there.
But Web Street's chances of big-time success are getting slimmer by the day. You could sum Web Street up in a word -- late. As in late to the game, late to go public and late to make the moves needed to compete.
Web Street had revenue of $17.1 million and a net loss of $3.9 million for the nine months ending Sept. 30. The company had $519 million in assets at the end of that period.
For reference, E*Trade (Nasdaq: EGRP) had $173 million in revenue for its most recent quarter. E*Trade's sales would have been higher if it wasn't aggressively marketing to the same hyperactive traders, also known as Web Street's core customers. E*Trade had more than 1.2 million active accounts compared to Web Street's 73,000 as of Sept. 30.
Unfair comparison you say? Maybe, but size matters in this market as does distribution and scale.
Web Street said it plans to spend $24 million on marketing and brand building with the proceeds of its IPO, which is supposed to bring home about $31.3 million. That marketing budget isn't bad, but E*Trade will spend that amount in a quarter with ease. National Discount Brokers (Nasdaq: NDB) and the rest of the pack aren't far behind.
In addition, the online broker game is changing dramatically. It's not just about trading volume anymore. The game is about additional financials services, better IPO distribution and acquiring customer assets to smooth out the ups and downs. The online guys are also clashing with established firms such as Morgan Stanley Dean Witter and Merrill Lynch on the Web.
Just this week, Ameritrade (Nasdaq: AMTD), Charles Schwab (NYSE: SCH) and TD Waterhouse (NYSE: TWE) said they were forming an online investment bank to gain access to IPO shares. Those three may have the clout to get shares, but Web Street doesn't even though it is a co-manager of its own IPO.
Hyperactive traders could leave Web Street to follow the IPOs.
Just a few weeks before the Ameritrade, Schwab and Waterhouse deal, Wit Capital (Nasdaq: WITC) bought SoundView Technology to boost its holdings. Web Street won't have the capital or the stock currency to buy itself that kind of girth.
Web Street is also dependent on trading volume as more than half of its sales come via commissions. Volume is strong now, but fluctuates depending on the season.
"Our growth may depend in part on our strategy of providing other online financial services, including banking, consumer credit, home mortgage brokerage services, insurance and merchandise payment, as well as the online distribution of securities in public offerings led by established investment banking firms," said Web Street in regulatory filings. "We may need to enter into acquisitions, joint ventures or other alliances to offer these additional financial services."
And if Web Street can't diversify? It'll be bought by a competitor.
News and notes
Priceline.com (Nasdaq: PCLN) is taking a hefty $1.1 billion charge and diluting shares to gain access to tickets from UAL Corp.'s United Airlines, US Airways Group Inc. and AMR Corp.'s American Airlines. Now Priceline has all the major airlines in its stable.
So will investors focus on the charge or the potential revenue growth? Go with the revenue. The real bottom line, which includes charges, died a while ago. Now it's all operating earnings and revenue growth.
Schwab got SEC approval to allow investors to view IPO roadshows on the Internet. Schwab, however, is limiting the roadshows to only its richest customers. Although the average trader may be left out, times are changing. In the near future, IPO roadshows may be viewed as commonly as earnings webcasts.
The Nasdaq is apparently struggling with volume just like the online brokers. A software upgrade attempt wiped out trading late yesterday. One question lingers: Why try to upgrade the software when trading was still in session?