Analysis

Plus500 Tanks 30% as Management Signals ‘Materially Lower’ Profit

Not only revenues were lower by 45% when compared to the first half of 2018, but 2019 expectations are mute

Plus500 reported a massive year for the company this morning. Nevertheless, the news was not welcome for investors as shares of the company dropped over 30 percent in the aftermath of the announcement.

The difficulty of reclassifying clients to professionals was obvious in the firm’s annual earnings report where it stated that only 44 percent of applicants were approved to reclassify. This netted to a total of 7,229 clients.

The decline doesn’t come as a huge surprise, but the market appears to have gotten ahead of itself when valuing Plus500. This may be partly due to the multitude of upbeat updates from management which guided the market higher.

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The first half of the year was massively impacted by the unfolding of the cryptocurrency boom. The revenues of Plus500 at the time ballooned to record levels surpassing even the most optimistic forecasts due to the losses of retail investors invested in cryptocurrencies.

The looming FCA decision to ban cryptocurrency CFDs is awaiting just around the corner, leaving the probability of the first six months of 2018 as being a one-off event as very high.

Despite an upbeat tone on part of the company’s executives repeated over the past several months, the ESMA appears to have impacted the firm. In the run-up to the earnings report, shares of the company decoupled from the rest of the retail brokerage industry.

Plus500’s stock rallied over 20 percent since the start of the year and more than 40 percent since bottoming out in October last year. Today’s decline erased those gains as the company’s shares traded 50 percent below the all-time high marked in August last year.

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Key KPIs and Shifting Markets

While the company closed 2018 with a record number of 223,864 active clients, that figure declined by 55 percent during the final quarter of last year to 101,634. New clients declined even more abruptly, due to the base effects of the crypto boom in Q4 2017. Plus500 reports that it acquired 19,405 new customers in Q4 2018, in contrast to over 150,000 in 2017.

The management’s expectations are signaling to the market that last year’s performance was a one-off achievement. User acquisition costs in the final quarter of last year skyrocketed 424 percent to $1,489 per client. Meanwhile, the average revenue per clients rose 158 percent to $1,523 per client Q4.

Compared to the full year figures, the trend in client acquisition costs is higher, while average revenues per user are lower. Having in mind the latest developments in the market the management’s guidance to lower its revenues guidance for 2019 fits in.

The rise of cryptocurrency deposits throughout 2017 and 2018 was a very solid booster to Plus500’s growth over the years and similar market conditions are unlikely to return in the near future.

The results in the final quarter of the year show that Plus500’s momentum which it carried through from the first half lost inertia in the final three months of the year. The company’s revenues in the second half of 2018 declined by 45 percent when compared to the first six months of the year to just under $255 million.

Shares of Other Retail Brokers

After tanking sharply at the market open, shares of other retail brokers in the UK stabilized at lower levels. IG Group is trading about five percent lower as of writing, while CMC Markets is lower by only 1.5 percent. The impact of Plus500’s guidance on other firms shouldn’t be too big of a deal.

The structure of the earnings of Plus500 in the final quarter of 2017 and the impressive performance in the first half of 2018 are tied to cryptocurrencies. At the time the market gave Plus500 a significant premium over its competitors, a premium that now appears all but voided.

A Chart of Plus500, IG Group, CMC Markets and GAIN Capital
Relative performance of shares of major listed retail brokers, Source: Yahoo Finance

As we can see from the chart above the performance of shares of Plus500 over the past year is now roughly in line with those of IG Group. The Israeli broker’s shares are still performing better than those of CMC Markets.

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