Shares in online contracts for difference broker Plus500 (PLUS) traded 6.4% higher at £15.22 following the announcement of a 48% increase in first half profit and an assurance that full year revenues would be 'significantly' ahead of forecasts.
On top of the increase in sales guidance, the company unveiled a $12.6 million share buy-back which follows on from its previous $25 million share buy-back announced in February.
Despite the market’s positive response to the groups’ raised sales guidance, we believe there are reasons to take a more cautious view to these results.
Clearly, there has been a marked slowdown in the rate of new customer additions. In the first quarter of this year the group secured 89,406 new customers, while the corresponding figure for the second quarter was just 47,574 new customers.
Equally disconcerting is the sharp rise in average user acquisition costs, which jumped from $634 a year ago and $473 in the first quarter to $903 in the second quarter of this year.
Given this toxic combination of falling group revenues - excluding acquisitions - declining customer additions and rising costs, the outlook for EBITDA is also a worry.
The group achieved EBITDA of $129m in the third quarter of last year, but it seems unlikely to match this figure if the current revenue and customer growth trends persist.
We also have broader concerns regarding the long-term outlook for Plus500. First, the spread betting segment has been artificially boosted during the Covid pandemic as individuals have turned to financial speculation as an alternative to live sports betting.
Given the gradual reopening of activities as the pandemic partially abates, the transient boost to the sector is likely to dissipate.
Second, the announcement of further acquisitions in the form of Cunningham and CTS raises further red flags. Arguably these acquisitions simply disguise slowing and volatile revenue growth that is contingent on both market volatility and bored punters.
Finally, the persistent use of buybacks to reduce the number of shares in issuance is a neat way to 'goose' earnings and disguise what might otherwise be a disappointing drop in profitability.
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