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OptionsXpress: Good Trade, Bad Investment


ThinkorSwim's deal floated to the top, OptionsXpress's will likely sink.

Online brokerage firm OptionsXpress (OXPS) is set to report earnings on Tuesday and while the company offers an excellent platform for trading, its stock might not make the best investment.

When the company first launched in 2000, it benefited from the changing landscape of the options industry. Multiple listings across exchanges, improved technology such as electronic exchanges, and decimalization helped spur trading volumes and level the playing field.

From 2001 to 2007 total option trading volume increased by more than 30% a year. By being one the first firms to specifically target option traders OptionsXpress was able to ride that growing wave, which helped offset the demise of day traders when the tech bubble burst.

Slowing Growth

But, overall option trading volumes will likely grow in the 20% range this year and will likely slow in the future. Likewise, OptionsXpress's new account has slowed from about 18% to around 9% over the past two years. Granted, as the client base increases it's harder to sustain double-digit percentage growth, but with around 350,000 accounts, it still remains a relatively small player in the online brokerage business with firms like Schwab (SCHW) and Ameritrade (AMTD) having four to six million accounts.

While the recent recovery of the stock market has led to a pick-up in trading activity as investors dip back into the market, it's unlikely to be as robust as earlier years. For the month of September, OptionsXpress reported that retail daily average revenue trades
(or DARTs, which are an important metric for profitability) was 29,000, or down about 2% from August, but was a 25% increase over the year-ago period. Bear in last September most investors were looking at their computer screens like a deer into headlights.

Making Educated Customers

In an attempt to spur new account growth, OptionsXpress purchased education company Optionetics. The plan is that Optionetics, in using the OXPS platform in seminars and presentations, acts as a feeder system to gain new customers.

This tactic worked fairly well for ThinkorSwim when it bought Investools a few years back. But OptionsXpress already had a working relationship with Optionetics to steer customers, so I think that simply bringing it in will only have a marginal impact.

The stated goal is that Optionetics will help add 10,000 accounts annually, and while they don't break down where accounts originate, it seems that so far the numbers are running behind that pace.

Another concern might be the quality of those customers that came by way of Optionetics. Not to disparage Optionetics, it has been in business a long time and has many happy customers, but my experience is that people that sign on to learning a trading "system" tend not to have the longevity or success of those that are taught fundamentals and concepts of different strategies.

By comparison, ThinkorSwim already had a highly regarded educational component before it acquired Investools and used that more for its footprint and distribution than to cross-sell seminars or software. ThinkorSwim also has what many feel is a superior trading platform and its customers tend to be more active traders.

Ultimately, ThinkorSwim was acquired by Ameritrade for $600 million early this year. Based on that valuation -- which was around 1.6 revenue and seven times earnings -- it worked out to be about $11 a share, about a 65% premium to the then-current price. Using this measure, OptionsXpress would be worth around $15, or about 15% below its current level.

But it should be noted that in January, when Ameritrade made the bid for ThinkorSwim, the stock market was still in dire straits and many retail investors had washed their hands of trading. The prospects have certainly improved since then, as have most online brokers' share price. Shares of OptionsXpress have doubled since their March low, but they're still some 50% below there all-time high.

While OptionsXpress still has room to grow and might be an attractive target for a larger firm to bolt on an options platform, the stock seems fairly priced. For now I would suggest using the company to trade with, but not to invest in.

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