SIF Portfolio: Plus500 is riding high on cryptocurrency profits - what’s next?

Tuesday, Feb 20 2018 by
21
SIF Portfolio Plus500 is riding high on cryptocurrency profits  whatrsquos next

Is the cryptocurrency boom turning to bust? The chart below showing the value of Bitcoin since June last year suggests that it might be.

On the other hand, investors who have HODLed have seen the value of their coins rise by more than 85% since 5 February. Rivals Litecoin and Ether have also staged strong comebacks.

This rapid rebound means that anyone who bought Bitcoin as recently as October has already doubled their money. So the boom could still have further to go before it peters out, as I believe it will.

5a8c0de8419a3P1.png

Source: IG.com

Stock market crypto-winners

Which stocks have profited from the cryptocurrency boom? Leaving aside the rash of dubious AIM firms that have climbed on the blockchain bandwagon to boost their share prices, CFD firms have been among the big winners.

One of the most notable of these is Israel-based Plus500. New customer numbers rose by 136% in 2017, helping to lift revenue by 33% and earnings per share by 72%:

5a8c0dfb8102bP1a.png

Source: Plus500 Ltd 2017 preliminary results

It’s worth noting how profits rose twice as quickly as revenue. Much of the improvement in profit margins appears to have been driven by the fall in average user acquisition cost (AUAC), which dropped by 60% from $1,195 to $474.

I’d hazard a guess that much of this reduction was due retail customers seeking out the firm in order to start trading bitcoin and other cryptocurrencies. Although Plus500 says that “less than 15%” of revenue came from cryptocurrency trading last year, I suspect the resulting contribution to profit was much greater than this.

Should I buy this stock?

Plus500 was one of Ed Croft’s NAPS choices for 2018. For similar reasons, this marmite stock has now qualified for my Stock in Focus screen.

I have to admit that the thought of buying this stock makes me uncomfortable. Personally, I can’t see how a company which grows so quickly and generates so much surplus cash can be a good quality, sustainable business.

I remember when the firm’s founders were happy to sell at £4 per share. Today the price is £12, despite the threat of regulatory restrictions on leverage.

Plus500’s performance has so far defied expectations, perhaps in part due to a good…

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Plus500 Ltd is an Israel-based company that develops and operates an online trading platform for individual customers to trade contracts for difference (CFDs). Its online trading platform allows its customers to trade CFDs on over more than 2,200 different underlying global financial instruments comprising equities, indices, commodities, options, exchange-traded funds (ETFs), crypto currencies and foreign exchange. The Company enables individual customers to trade CFDs in more than 50 countries. The trading platform is accessible from various operating systems, such as Windows, iOS, Android, and Surface, as well as Web browsers. more »

LSE Price
652.8p
Change
-2.4%
Mkt Cap (£m)
739.6
P/E (fwd)
5.6
Yield (fwd)
11.2



  Is LON:PLUS fundamentally strong or weak? Find out More »


21 Comments on this Article show/hide all

Chrisfarrell21 20th Feb '18 2 of 21
1

Hi Roland,

It's a good article, thanks, and on a share I'm interested in as it's a current holding. The essential message I got from your article is what I have been thinking for 6 months or so: the fundamentals can't be faulted, but there are other less tangible issues that cause it to be a share that twangs the nerves on a regular basis.

The recent full year results were impressive. As has by now become usual, they were better than expected for the full year, and revenue expectations for y/e 31 Dec 2018 were increased already, which seems odd/impressive.

As you said, year end net cash was $241.8m (£174m) which I understand does not include any client monies. They talked about a consolidated industry in the short to medium term, but don't say whether or not they will make any acquisitions. They certainly have the capability.

They are very generous with shareholder returns, either with dividends (or buybacks last year).

They seem to think the regulatory threat wouldn't affect them much, although I suppose it's in their interest to say that, and they state they would adapt anyway: "the Board believes the proposals are unlikely to have a material adverse effect on the Group's business". We'll see. Once ESMA announces its proposals, I expect the shares will take another hit, but the market is aware of the worst outcome in terms of the reduction in leverage. There is a question mark over the CFDs on cryptocurrency, as ESMA tacked this on as an after thought to its consultation. I expect ESMA already knows what it wants to do on all scores, but had to go through this process to look like it cared.

On the customer churn, which Graham Neary has highlighted previously, they state that this has been reduced again in H2, apparently due to improved customer service. However it does not give any figures on this so I'm taking this with a pinch of salt.

I'm holding for the being, and will monitor this very closely, as they seem to find a way through the mire each time. Whilst the ESMA proposals will certainly affect PLUS, and competitors, it is not these companies that they are trying to stop. It's the much much smaller end of the market, like the old boiler rooms.

If there is a general market slowdown, or worse, this will be hit sharply, as it's only really everyone's general appetite for generally risk-on assets which is providing these bumper profits. I reserve the right to dump my holding at any time if it starts to freak me out.

Thanks

Chris

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VegPatch 20th Feb '18 3 of 21

thanks Roland.

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AlanJenkins2 20th Feb '18 4 of 21
2

I commend your objectivity,Roland.I've been advised both to buy and to short it. I'll continue to steer well clear..

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clouds 20th Feb '18 5 of 21
3

Hi Roland,

I see you are buying in, but somewhat reluctantly! A few points:

- It looks like your dividend yield stat is based on the interim & final dividends, and excludes the special dividend. If you include this the dividend yield is more like 10%. They often pay a special dividend, the size can vary significantly, but that can be the case for the normal final dividend as well. They have also done a small amount of share buybacks in 2017.

- Developments of their systems are expensed as incurred (I believe), which can lead to a low book value. Personally I would probably prefer this, as it means profits match closer to cashflow. If they capitalise a large amount of development costs, this would inflate profits, so I would suggest this treatment is conservative accounting (assuming they could capitalise some if they wished).

- I suppose some of the positive points are captured in the stock ranks, but you don't seem to dwell too much on the positives. They have generated very strong cashflow, shown strong growth (revenue & customers), very high returns on capital, strong balance sheet.

- There is uncertainty regarding new regulations, and what will happen with the crypto side (either due to regulation or interest passing). In terms of regulations it is worth looking at what happened in Japan when they clamped down on leverage some time ago. It's also worth thinking about the offsetting uncertain positives, which are perhaps harder to envisage but could lead to a very good outcome e.g. new licences / expansion in to other countries could lead to the business being much larger and with lower proportional exposure to individual regulatory environments.

I am long (as you may have guessed). Appreciate people are wary of the company, and it's had an interesting ride so far, but I do wonder if it's sometimes judged harsher than some other company's.

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AnonymousUser252054 20th Feb '18 6 of 21

Massive profits YE 2017, 100 per cent returned to shareholders.

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Roland Head 20th Feb '18 7 of 21
3

In reply to post #327863

Hi clouds,

Thanks for your comment. I think I did miss the special dividends and buybacks, so thanks for pointing these out.

I don't always like to include special dividends in my calculations of yield, as they can set expectations for the future at unreasonable levels. But I certainly agree that Plus500 (LON:PLUS) has been an outstanding generator of cash and has been disciplined at returning this to shareholders.

Regarding assets -- I agree that it's prudent to expense software development costs through the income statement, but I'm slightly surprised that the company doesn't seem to attribute any balance sheet value to its brand, platform and IP.

On the other hand, I suppose that these intangibles would be pretty worthless if the group fell out of favour with customers (or regulators). So perhaps an expense-only approach is the most transparent and appropriate way to value the business.

I think I mentioned some of the positives, but I suppose my stance is affected by my view that the firm's earnings may lack the quality and durability of rivals such as IG Group (LON:IGG) and CMC Markets (LON:CMCX). 

Note in the table at the top of this article that average revenue per user at PLUS fell by around 34% last year, while the proportion of new customers rose.

I can't escape the feeling that this company makes most of its money from inexperienced and (often) loss-making traders, many of whom throw in the towel after a short while. This makes me a bit nervous.

Regards,

Roland

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Roland Head 20th Feb '18 8 of 21

In reply to post #327733

Hi Jasper,

Thanks for your comment. I certainly agree that Plus500 (LON:PLUS) management certainly seem very able and have made a lot of money for investors (including themselves) so far.

Regards,

Roland

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abtan 20th Feb '18 9 of 21
2

I used to be a Plus500 (LON:PLUS) holder, but have been put off by quite a few factors, and NOT by legislation/regulation fears.

I made a few comments in another Discussion (starting from this post) that may be of interest to readers here.
In short:

  • 2017 profits were materially influenced by the crypto spike in Q4. Without it results would not have been much better than those reported in 2016.
  • Plus got lucky in 2017; they'll need another unusual "crypto-type" event in 2018 to even stand still (in my opinion).
  • Churn is high, placing the emphasis on new customer acquisition. By my rough calculations customer acquisition spend seems to be going down  (perhaps linked to not being able to offer bonuses to potential sign-ups as of last year?). I imagine the SEO space is already quite saturated, so I would expect marketing spend to go up as the different providers jostle to get to the top of search results.


A

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clouds 21st Feb '18 10 of 21

In reply to post #327908

Thanks for the response Roland.

I think ARPU & AUAC have been skewed by a couple of factors:
- Large number of new customers in Q4, who wouldn't have had much time to contribute revenue when looking at the year.
- Cost of acquisition falling due to new users seeking out a way to trade cryptocurrency's.

They do gain a large number of customers, and many of those don't stay with them. I've heard this described as a process whereby the underlying growth (that remain with them) is still substantial, even after such a large number stop trading with them. I think this is probably supported by the active customer numbers vs new customers reported over time.

I'm not always convinced IG Group (LON:IGG) are as different as people think, for example on the regulatory side they used to offer binary bets (which are / or are being banned by ESMA, and personally strike me as a fairly ludicrous offering), and allowed accounts to go into a negative position (I think also being banned by ESMA). Appreciate they are perhaps generally more aimed to serious investors / traders. Interestingly IG have often seemed more concerned about the ESMA regulatory changes when compared to Plus500 (LON:PLUS). I do wonder if PLUS have substantially lower operating costs, and may be better able to cope with more adverse conditions. PLUS also are less UK focused I think.

It's worth seeking out the Odey Asset Management commentary on PLUS, I found it helpful.

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Roland Head 21st Feb '18 11 of 21

In reply to post #327988

Hi clouds,

Odey is a major bull on Plus500 (LON:PLUS), with a 20%+ holding if memory serves me correctly. He's been proved right so far, too.

I take your point about gradually accumulating sticky customers. I agree that's probably a realistic view of how this sector works. As with any specialist activity that's in fashion, many people dip their toes in the water but only a few stick around.

My concern is that the attrition rate at PLUS is higher than at some rivals. However, this may simply be because of the firm's target user base (retail traders). In contrast, my understanding is that it's now quite hard to open a CFD/SB account at IG.

I think this whole sector carries some risk, but my feeling is that CFDs and spread betting are a natural fit in today's electronic trading world and will persist. What could change is the shape (and profitability) of these services. Remember how profitable stock broking used to be...

Cheers!

Roland

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AnonymousUser252054 21st Feb '18 12 of 21
2

'Odey is a major bull on Plus500 (LON:PLUS), with a 20%+ holding if memory serves me correctly. He's been proved right so far, too.'

ODEY ASSET MANAGEMENT - 12.75% (Previous position: 13.98%), from RNS a couple of days ago. He's been selling for a long time, actually

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atali1 21st Feb '18 13 of 21

You can see what Odey's fund says here: https://www.odey.com/media/251921/odey-arff-gbp-a-dec-17.pdf
Very bullish on the future of Plus.
They have been selling  throughout the past few months. Probably mostly due to the need to rebalance as Plus has gone up so swiftly for them.

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AnonymousUser252054 21st Feb '18 14 of 21

In reply to post #328533

Interesting report but I think they've been selling since £4.

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VegPatch 21st Feb '18 15 of 21
1

I think its more accurate to say Odey has been rebalancing as his flagship fund was down 49% at one point recently over the last 2 years. Outflows & need to rebalance. Forced seller.

A bit like Neil Woodford could well be soon if his run of dismal performance doesnt improve. He holds some highly illiquid positions. Now that could be an interesting case study of illiquidity meeting forced seller...

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Roland Head 22nd Feb '18 16 of 21

In reply to post #328523

shine66,

Thanks for pointing this out. I should have checked!

Having taken a look, he dropped below 20% in August.

Roland

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Edward John Canham 22nd Feb '18 17 of 21

8% down this morning.

Cant see any news.

Phil

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Edward John Canham 22nd Feb '18 18 of 21
1

Ignore me - ex div

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ACounsell 22nd Feb '18 19 of 21
2

Roland,


I think your comment ‘Plus500 (LON:PLUS) business model does seem to be dependent on a constant supply of new customers each year. Presumably this is because many customers lose money and stop trading after an initial period of enthusiasm’ hits the nail on the head!

From my personal experience Plus500 (LON:PLUS) is basically a CFD gambling site and I was caught out trying to hedge a 'smallish' long position in a metals ETF (clearly outside my area of expertise!) when the price spiked hugely and they halted trading in the instrument. When they restarted trading a few days later the price opened way above my stop-loss, the position closed and I lost considerably more than my stop-loss. 'Caveat Emptor' on my part but I suspect that Plus500 (LON:PLUS) are doing so well because c. 80% of customers lose money on their transactions. As a past holder of the stock making a decent profit with various sales in 2014/15, before selling the final tranche when the share bombed in 2Q 2015 (c. 50% fall - regulatory issues) I should have kept the shares and steered well clear of the product!

I think you are right to view this with trepidation - the financials look too good to be true, regulatory risk is high, the business HQ is in Israel and the Crypto bubble must surely burst. Good luck with this one in the SIF portfolio.

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mpat89 23rd Feb '18 20 of 21

Not sure why lack of non current assets is a concern. At worst this is a conservative accounting approach by management.

Professional Services: Web hosting
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Sk8dad 29th Aug '18 21 of 21

About 6 months have passed since this evaluation, and everything appears to have continued well, except perhaps the share price if the last few weeks are anything to go by. A high of £20.10 per share, then interims knocked this back to around £15 - fears of regulations hitting revneues, which I think have been overdone in the SP given the slides the company put out recently. I'm increasing my holding at these levels. It now passes 9 Guru screens btw.

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 Are LON:PLUS's fundamentals sound as an investment? Find out More »



About Roland Head

Roland Head

I'm a private investor, analyst and writer on stock markets, with a particular fondness for free cash flow, dividends and value. My main interests are UK and US stocks. I also have an interest in (profitable) commodity stocks.  I hold the CFA UK Investment Management Certificate (IMC). One of my investment interests is developing rules-based strategies such as my Stock in Focus portfolio. This reflects a significant part of my personal portfolio and is the subject of my weekly column here at Stockopedia. In earlier life, I worked as an engineer in telecoms and IT. The rules-based and quantitative approach required for this kind of work undoubtedly influenced my investing style. I also learned a lot from seeing the tech bubble deflate in 2000-1, when I was working for a very large and now defunct Canadian telecoms firm.  more »

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