The share price of Plus500 (LON:PLUSP) (LSE: PLUS) crashed in February, and the reasons were various. Increased regulation, accountancy errors admitted in its 2017 financial report, falling first quarter profits and clients winning their bets caused analysts to downgrade their targets and investors to flee. In my opinion the firm is over the worst, and its share price is now displaying evidence of bottoming out. My optimism also extends to the wider retail betting industry. Let me tell you why.
The Financial Conduct Authority (FCA) and the European Securities and Marketing Association (ESMA), recently clamped down on retail trading brokers and spread-betting firms. After a period of investigation, the ESMA placed strict limits on the leverage clients can use to place their market bets. The rules came into place from July 2018. Many brokers have folded since, both in the UK and wider Europe, after many of their clients stopped placing financial bets. But like all other sectors, the fittest survive. Plus500 is fit and has the right strategy in place to ensure it survives and thrives.
Why the fundamentals and technicals are a plus for Plus500 In my opinion, the various shocks that caused February’s severe sell-off are now priced in. Since collapsing from a 52-week high of 2,076p, the share price has traded in a narrow range for several weeks. Evidence of this range is illustrated by price currently trading close to the 50-day simple moving average. This simplified technical indicator suggests the market sees no reason to downgrade the firm’s value further, after closer analysis of the fundamental data. So let’s move onto those fundamentals.
At the time of writing, Plus500 traded at 600p. With a market capitalisation of £660m, the heady days of being valued unrealistically at over £2bn are long gone. The firm has zero borrowings and liabilities of $51.90m. The firm’s P/E ratio is now 5.27 and the last pre-tax profits up to December 2018, came in at $503m on revenue of $720.4m. Rewind back to the 2014 revenue figure of $228.86m and pre-tax profits of $138.12, and it’s clear to see the improvement the firm has recorded since its July 2013 flotation.
Despite its customer growth finding reverse gear, falling by -4% during 2018, a snapshot of current activity highlights the current performance. According to the firm’s latest key performance indicators for the first quarter of 2019, the current active client number is hovering at 100,000, where it’s remained since the second quarter of 2018. The new client acquisition number comes in at 20,000 during the same period.
One reason I remain bullish about retail trading and the spread betting sector in general is due to my conviction that the industry has created new foundations from which to grow, after the huge shake-up which the FCA and the ESMA caused. In an excellent commentary a month back, fellow Fool Paul Summers also highlighted a reason why the share price of Plus500 might recover: Bitcoin is now up approximately 150% year to date, which can only benefit brokers such as Plus500, who allow their clients to trade crypto-coins.
Paul Holmes has no shares in Plus500. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019