FTSE 250 financial trading firm Plus500 (LSE:PLUS) has seen its share price rise a meteoric 77% since the stock market crash in March and it is up 103% in a year.
Founded by a group of Israelis 12 years ago, the company was designed to provide a high-tech trading platform to ordinary retail investors. It is a global company that has enjoyed considerable success. Users have the option to trade a variety of financial instruments on the Plus500 site. Along with equities, you can trade cryptocurrencies, indices, forex, commodities, options, and ETFs.
It specialises in CFD trading, which stands for contract-for-difference. This is a way of trading without buying the underlying asset. It can be lucrative, but is complex and highly risky because you can lose money rapidly due to borrowing the capital needed to invest through leverage.
Lucrative response to volatility
Yet with the coronavirus pandemic creating high volatility across global equity markets, Plus500 has been in the perfect position to reap the rewards. The Plus500 share price has performed exceptionally well this year, but this upward trend may not be sustainable. During the cryptocurrency boom of 2017/18, the FTSE 250 company enjoyed a chart-busting year, only to slump once the volatility subsided.
New customer acquisitions and commissions on customer trading contribute to company revenue. During Q4 of 2017, at the height of the Bitcoin boom, Plus500 brought in more than 150,000 new customers. By comparison in Q4 2019, it brought in just under 19,500. In Q1 2020, it was close to 83,000 new customers, but that was well short of the earlier Bitcoin-driven surge.
Despite this, market volatility is likely to remain in play for some time to come. The pandemic has not been eradicated and although lockdowns are tentatively easing, it is not yet clear how successful this will be. The US-China trade war is reigniting and deep unrest in America is causing further concern. Geopolitical tensions are still apparent in the oil markets, which have a direct effect on the stability of equity markets. For these reasons, I think Plus500 will continue its good run for some time to come.
Strong financials
The company’s shareholder returns policy is to give back at least 60% of net profits to shareholders every six months. Plus500 has a price-to-earnings ratio of 11, which is attractive to investors. It offers a 4% dividend yield and earnings per share are £1.09. The group also has little debt, which makes me think these financials look good as a long-term income investment.
Nevertheless, it still carries some risk. In 2019, the UK financial regulator introduced tougher rules for trading CFDs, which negatively affected Plus500’s profit margins. The regulator put these changes in place to protect consumers from the high risk of monetary loss. Plus500 competes with IG Group and CMC Markets, which were also affected. Similar regulations are looming in Australia, which is likely to further affect its bottom line.