Plus500: How to make money from CFD trading

just in another way as you would have imagined

Intro

Actually, I had planned to look at Markel in detail. However, through detours I landed at Plus500.

If you wonder whether CFD trading is profitable, you should take a closer look at Plus500. To be more precise, CFD trading is usually only profitable for the provider. Plus500 is based in Israel and holds licenses in 12 countries. Just under half of its revenue is generated in Europe (ex UK), 1/8 in the UK and the rest spread around the world.

Financials

An EBITA of 454m was achieved in 2022 based on revenues of 833m. The EBIT of 454m went almost 1:1 into OCF and as there is almost no CapEx, FCF was also around 450m. 106k new customers led to a total of 281k active customers. Revenue per customer (ARPU) was $3000, while customer acquisition costs (AUAC) were $1500 per user. The expenses for customer acquisition pay off after 1-2 years.

The number of active customers over the year decreased from 407k to 281k. 82% of all trades are made from cell phones or tablets and most of the revenue is generated from customers who have been with Plus500 for 1-3 years.

Business Model

Plus500 itself states that the revenue is mostly generated from OTC trading and exactly through the spreads and overnight charges. The rest of the turnover is earned through non-OTC. Plus500 defines these as commissions on futures and options as well as customer trading performance. Trading performance is simply the amount of money lost by customers to Plus500.

At least 50% of net profits are distributed to shareholders through dividends and share buybacks. Revenue has grown at a CAGR of 25% over the past 10 years. In 2022, as much as 70% of profits were distributed to shareholders in the form of dividends and share buybacks. In Q1/23 alone, shares were bought back for nearly $50m.

Growth is planned in the US retail market. For this purpose, an advertising deal with actor Kiefer Sutherland (known, among others, for the series 24) was concluded. New licenses in Japan and the UAE should ensure further growth.

The times of extremely high sales jumps through the Corona years are over, however, sales are expected to grow from 601m in 2023 to 650m in 2025.

Valuation

With a market cap of 1.6Bn, Plus500 has 950m in cash on the balance sheet. This results in an EV of 650m. The forecast for 2023 is for revenue of 601m is down 28% year on year. EPS is expected to fall from 3.8 to 2.4 or by 37%. This brings Plus500 to a forward PE of 7.4. In the past, FCF has always been above EPS. Assuming the FCF is also 2.4 then Plus500 comes to an EV/FCF of just under 3.

There is a risk of increasing regulation as Plus500 and other CFD providers are not always the shining example of a white knight.

Cautious remarks

A few words of warning: Plus500 does not publish how much of the turnover is won by client funds. As a rule, Plus500 trades against the client. That means Plus500's profit is the client's loss. At the same time, there are some reports online where clients could not close trades that were heavily in the plus. Likewise, it seems to be difficult to transfer one's funds out from the platform.

As per the great Tom Gayner, CEO of Markel: Only invest in companies which create value for their customers. I have doubts that this is the case here.

Surprisingly, Plus500 has a score of 3.9 on Trustpilot.

Here is a nice article from the Financial Times that gives some background.

https://www.ft.com/content/dc9ce455-0853-32bb-af55-67971ce42b73

Any casino can close its door to a persistent winner: sorry, we’d rather not have your business. Online complaints about Plus500 fall largely into three categories: arbitrary application of scalping rules to stop loss abuse that allow Plus500 to cancel trades, problems with the technology resulting in trading losses (I couldn’t trade, I didn’t get the price I expected), and difficulties withdrawing money from the system.

It is very hard for an outside observer to assess the validity of these claims, which often feature email correspondence from Plus500 customer representatives (Vanessa, Miguel, George…). Unlike, say, computerised gambling machines found in casinos and bookies, there is no third party monitoring the software to make sure it is set up fairly.

Summary:

At these levels Plus500 is valued at a very interesting level. Based on the moral and business risks attached to this company, one should think twice before investing.

Invest at your own risk, this is not financial advice! This is not a recommendation to buy or sell securities discussed in the article.

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