(FORTUNE Magazine) – Based on its recent financial performance alone, online broker Ameritrade (AMTD, $11) hardly seems like a company whose shares have lost more than a third of their value over the past year. The company had a monster fiscal 2004, generating more net income than in all of its previous 28 years of business combined. Operating margins hit an all-time high of 62%. And it posted an impressive 22% return on invested capital. In its most recent quarter, Ameritrade grew diluted earnings per share by 35%, easily beating analysts' expectations. Yet the stock price has dropped $3 since New Year's alone.

Why the discrepancy between Ameritrade's income statement and its battered shares? There are two major reasons. First, competitors such as Schwab and E*Trade have recently cut trading fees, and a pricing war could hurt the bottom line of the pure-play broker. "Ameritrade could become the low-cost provider, but cutting all trades to that cost would hurt revenue," warns Colin Clark, an analyst for Merrill Lynch who has a neutral rating on the stock. Second, investors are concerned that January's atypically weak market returns and quiet trading volume might signal a broader dropoff during 2005.

Regardless of monthly market volume, many observers expect revenues at Ameritrade to be lifted in a rising industry tide: Right now only 10% of all trades are conducted online, and analysts expect about 5% annual growth in the industry as more investors migrate to the Web. "The stock is very cheap for a company that in a reasonable market can grow earnings between 10% and 20% annually over the next few years," says Mike Holton, who last year made Ameritrade one of the top ten holdings in his T. Rowe Price Financial Services fund. Even after integrating seven acquisitions in four years, Ameritrade has the industry's lowest operating costs. That efficiency, analysts say, will help the broker stay highly profitable as it grows. With the stock now trading at just 14 times projected 2005 earnings, investors can expect future returns to better reflect Ameritrade's healthy financial results. -- Julia Boorstin