A profit warning came today from one of the better performing companies in the market: Plus500 (LON:PLUS). Fuelled by the cryptocurrency boom, they have been growing at a stellar pace, and even though the results were good on paper, the cut in outlook decimated its share price today:
The share price moves in this share have been spectacular over the past year, and even the years before that. A year ago, you could have bought in at under the £10 level, and the shares rocketed to over £20 by last summer, before being heavily sold off in the market rout that followed. Recently, the share has been recovering but today’s update has but the brakes on that, and has taken a massive step back.
The warning today and share price is surprising in some quarters, but perhaps not so in others. For many private investors, Plus500 may have been their best performing equity last year. Stockopedia loves it, with a rank of 99 and for a long period last year was good evidence of the merits of the ranking system. However, Stockranks are a backward looking metric, and since August the share was increasingly shorted by institutions, to the extent that at one point it was the most shorted share in the market. It now looks like the shorters have called it right.
The warning comes in a February 12 update where preliminary results were shared. The initial results seem incongruous with a profit warning: turnover up 65%, profits up 90%, cash generated from operations up 78%. But what investors were looking out for was the outlook, as the ESMA measures started to bite only in the last quarter of the year. In this regard the news was not good:
Following our latest assessment of the impact of the ESMA regulatory measures, FY19 revenue is expected to be lower than current market expectations. This, combined with our intention to maintain our marketing spend, is likely to result in 2019 profit being materially lower than current market expectations;
No guidance is given for this figure – perhaps unsurprisingly as it may be very difficult to predict how things might pan out in the future.
Liberum issued a note (available on Research Tree) noting that clients lost a net £56m in the last quarter due to the broad sell-off in markets. Their forecasts show that 2018 was a real exceptional year, and 2019 profits will be approximately half ($272m v $505m).
For anyone remotely interested in buying shares, Plus500 will be well known. They describe themselves as the leading contract-for-differences provider, which is a fair description. This allows some distinct advantages over traditional share traders as a position can be taken at zero cost (minus the spread), making it ideal for those who wish to stake less or exit markets over a short-time period.
They have been expanding rapidly and adding new countries, and the core product needs little to no adaptation. The addition of the heightened interest in Bitcoin and the rest sent Plus500’s profits into overdrive: cryptocurrency is an ideal product for them: offering an extremely liquid market plus many unsophisticated traders. It was literally a cash machine for Plus.
PLUS make their money from the spread, and also a calculated interest charge on the leverage given. The latter aspect is not well understood by newbie investors I believe, and the charges are not that transparent, meaning that often people can spend more than they think.
Things changed in 2018 with the EU imposing new rules to protect investors from losing too much money: binary options were banned, and a raft of measures that impacted CFD trading were invoked: reduced leverage limits, prohibition of bonuses, and negative account protection.
Several aspects of the company make it a very attractive purchase: the high profit margins, the high cash conversion and generous dividends, for example. Today’s announcement shows that the total dividend for the year is $1.99, which is an absurdly high yield on the current price, at which the market doubts whether it can be paid.
However, balancing against that is the structure of the company, and whether the results are sustainable or not as ‘beginner’ traders are always needed to replace those who desert the platform. On an active user front there could be signs of slow down:
A remarkable thing is the churn: from these figures we can see that in every year (aside from 2018) the number of new users is very high relative to the amount of active users. This perhaps comes as not a surprise – there are plenty of places to place a CFD bet. 2017 was an anomalous year, with a massive number of new users coming in at low acquisition costs, explained by cryptocurrency.
In the latest year new user growth seems to have dropped back to organic levels, but the costs are expensive: affiliates stand to earn plenty of cash from referring a user, particularly if they manage to stake a lot.
Normally on a profit warning we could talk about the stability of the company and its ability to carry on, but this seems almost ludicrous in the case of Plus500: there is no debt, and cash balances at last year end are estimated at $315m, with negligible liabilities. They are throwing off cash in terms of dividends at 60% of profits.
PLUS’s valuation has already reflected some nagging doubts. Even at the higher price levels the valuation relative to IG Group has been cheap, but perhaps for good reason as the mix of IG clients means it may have less exposure to ESMA regulation (and further regulation to come).
Another nagging doubt was that the figures may simply be too good to be true and hide something else (which we saw at Patisserie Valerie) and the Israeli management, rightly or wrongly make people a little nervous.
It is no secret that things have slowed in the last quarter, and the new regulations will have an adverse effect in the territories where it is applicable. There may also be tougher regulations to come in future, and the level of super profits may not be able to be maintained in the face of competition.
However my gut feeling says there will be enough investors willing to take a punt for the dividends, which would support the share price in the short-term and short of them being decimated in the next year, should considerably de-risk the investment. I can easily see Plus expanding and adapting to future territories and picking up new customers, although the high level of short interest says to me there may be something I am missing. This knocks off a point, and I will rate it at 4/5.