They are basically a betting site dressed up as an investment firm - they provide Contracts For Differences (CFDs) that allow punters to speculate on a variety of shares, indices, forex, etc.. They pull people in with similar incentives to betting sites - for instance a joining bonus that can only be cashed out after a certain number of trades.
What's driven the share price lower is:
- The founders cashing out some of their investment.
- Announcements from various financial regulators that they are looking to crack down on CFD providers.
This announcement from the FCA is the one that really spooked the market: FCA 6 Dec News
Plus 500 acknowledged that this would have an impact on their business: FCA Update
So why would I want to invest? Well:
- The FCA only covers 20% of their revenue. Other regulators are also cracking down, but Plus 500 are not particularly tied to one geography - they've demonstrated their ability to attract customers worldwide. Surely the whole world won't follow suit?
- They're now on a P/E ratio of 5, so there's a lot of downside priced in.
- The business is fundamentally attractive, apart from regulatory scrutiny - return on equity is north of 50%, pre-tax profit margin is about 50%. Profit flows through into cash and gets paid in dividends, there's little capital required to grow the business.
Even if revenue shrinks substantially I think Plus 500 can still be very profitable, and therefore they are well-placed to weather the regulatory storm ahead.
