Over the past couple of years, I have been annoying almost everyone I know by telling them to invest in Plus500. Many conversations have gone along the lines of…
“Hello, nice to meet you, my name is David…did you know that Plus500 has no debt and cash holdings equal to about half of its market cap?”
Their response is usually something like, “Errr…no…and can you please leave if you aren’t going to buy anything?”
It has made me feel a bit like Ol’ Gil from the Simpsons. Anyway, there are a few reasons why I think Plus500 is a great company to invest in.
As noted back in April, when I wrote something similar on CMC Markets, CFD providers tend to have a few attractive features.
- They make good money in ‘normal’ periods but make even more when there is market volatility. Look at IG and Plus500 earnings this year and you can see this. This means they continue to be profitable in the good times but can also make a lot of money when there is volatility / market downturns.
- They tend to have extremely good operating margins and a high return on capital employed.
- They have no debt and because of their high margins, they can use profits to fund growth and invest in R&D, as opposed to using debt or issuing more equity (unless you’re IG and decide to buy at the top of the market)
But looking at the three listed CFD providers in the UK – IG, CMC Markets, and Plus500 – you do not get the impression that investors are overly enthusiastic about the sector. Despite the trio producing respectable results so far this year, in contrast to almost everything else falling off a cliff, all three trade at relatively low valuations.
On both a forward and TTM basis, IG and Plus500 are trading below the UK market’s price-to-earnings (P/E) average. CMC is also below the average on a TTM basis but is slightly above it on a forward basis. The reason for this apparent dislike of the CFD sector is probably because…
- Investors seem to buy CFD provider shares when there is volatility and ride out the increased profitability it brings. Then they dump them as soon as they think it’s stopped. If you look at CMC Markets’ share price in the YTD (below), you can see this, as it experiences dramatic drops/increases depending on results / trading updates.
- There is a huge regulatory threat – it’s plausible that retail CFD trading could be banned in the UK and/or EU, as well as other jurisdictions.
- Restrictions introduced in 2018 may hurt profitability. I don’t think this is the case but there is an argument to be made that the volatility of the past couple of years has hidden how damaging these restrictions were to profitability.
- The wider UK stock market is deeply out of favour with investors anyway. The UK market average P/E ratio is lower than the European, emerging market, US, and Japanese averages.
CMC Markets share price in the YTD. Note that almost all sharp drops / increases have been driven by views on how volatility has or will impact revenues.
If you look at Plus500 specifically, there are definitely reasons why investors might be sceptical. These were probably best summarised by an acquaintance of mine who, when I tipped Plus500, responded, ‘what, that dodgy Israeli spread betting company?’
Or in practical terms…
- The founders sold off huge amounts of their shares in the business, almost from day one. They also pushed very hard for the company to be sold to Playtech. Neither of these things give you the impression they believed in the long-term potential of the business.
- There was the incident with the frozen accounts in 2015.
- There was the $103m accounting error in 2019.
- Possibly doing business in places they shouldn’t have been active in and other generally suspect behaviour, such as automatically maxing out your ticket size when opening a trade.
These points shouldn’t be discounted but, aside from perhaps the last one, it is hard to see how they will impact the business moving forward.
Regarding the sectoral problems that CFD firms face, there is not much Plus500 can do beyond continuing to deliver good financial results. My view is that concerns about regulation are overblown and the restrictions introduced in 2018 aren’t going to crimp profitability too much. IG’s massive growth in Japan over the past few years, where similar restrictions are already in place, arguably shows this is the case.
The lack of enthusiasm for UK-listed companies does continue to be a problem (although it arguably means there are a lot of good buy opportunities on the market today). But this is hardly in Plus500’s hands and one can only hope that investors ‘wake up’ to some of the potential in the UK and start to invest accordingly. In the meantime, the company has said it is looking into listing on the Nasdaq because it continues to receive such a low valuation in the UK. Who knows if that will happen given how poorly markets are performing at the moment, but if they do then it’s easy to imagine it giving a lift to the company’s valuation and thus boosting the value of existing investors’ holdings.
These more ‘macro’ points aside, the main things that make Plus500 a compelling investment are…
- It is priced relatively cheaply
- It makes lots of money and looks likely to continue growing
- It has no debt
Looking at the first point, Plus500 is trading at a lower TTM P/E ratio (6.2) than both of its London-listed peers. This is also less than half the market average of 13.1. So Plus500 shares could double in value and, at least on a TTM P/E basis, they would still have a lower valuation than the market average. The company also has a TTM dividend yield of 4.9%, which is above the FTSE All-Share average of 3.5%. The company has been very consistent in returning cash to shareholders over the years and there is no indication this will stop.
This sort of valuation might be understandable if Plus500 was a stagnant business facing some sort of existential crisis, but neither of these things are true. Indeed, the company just beat earnings expectations and has two major growth opportunities in the pipeline. Those are the US, where it has acquired a futures broker, and Japan, where it bought CFD provider EZ Invest. Yes, they were probably just copying IG when they entered these two markets but, as IG’s latest results show, these are good markets to be in.
Moreover, the company achieves these results with a much smaller number of employees than its peers. If you look at their most recent full-year results, IG made £982m in revenue, whereas Plus500 has made approximately £735m over the past 12 months. However, IG did this with around 2,100 employees. Plus500 did it with under 500. In other words, Plus500 made about 76.5% as much revenue as IG but with close to 20% of its headcount.
CMC Markets also made £326m in its last financial year with close to 1,000 employees. So Plus500 made close to double that amount with less than half of the number of employees. Assuming it continues its H1 performance of 2022 through to the end of the year, which is a big assumption, the company will probably make close to $1m in profit per employee, which is remarkable.
Things look even rosier when you factor in the company’s financials. Plus500 has no debt, and has not taken on any in its entire existence. I appreciate some people may not care about this but I hate debt and prefer companies that don’t have any. At the same time it had cash holdings of $950m at the end of June. By my calculation, that would mean almost half of Plus500’s market cap on June 30th was backed by cash. Some of that will be returned to shareholders, either via share buybacks or dividends, but the company keeps implying that it will make further acquisitions, which could mean more earnings growth down the line.
When you take this all into account, it’s hard to understand why Plus500 isn’t valued more highly by investors. I don’t think it will deliver some sort of 10x return in a short period of time but, in my opinion, the company is worth far more than it is today. The only way this is likely to change is if the company continues to deliver good results. As I believe that’s going to happen, I continue to be a true believer. So apologies in advance if we meet in person and I bore you by talking about it.
Stuff that happened