Shares in online contracts for difference (CFD) and cryptocurrency trading platform Plus500 (PLUS) have collapsed by 39% to 992p after the company cut it outlook for sales and earnings this year.

Despite strong gains in revenue and profit last year, the company sees turnover this year below market forecasts and warns that profit is likely to be ‘materially lower than current market expectations’.

PERFORMANCE MADE IT AN OUTLIER

Plus500’s shares have had a stellar run, gaining 160% in 2017 and more than 50% last year making it one of the best performing stocks on the London market.

As we said in December however, it seemed unlikely to be able to repeat the trick for a third year given that new European rules were impacting revenue growth.

Sure enough the company says that its ‘latest assessment of the impact of the ESMA regulatory measures’ is the reason it has cut its sales outlook.

This, combined with a high level of marketing spend which arguably the company needs to maintain in order to keep its market share, mean that earnings will be well below forecasts.

MOMENTUM RAN OUT

When companies consistently beat expectations, and their share prices rise in response, investors start to expect them to beat every quarter.

Plus500 repeatedly raised forecasts last year despite evidence from rivals that the ESMA rules were impacting trading, and investors went along with it.

At some point sales and earnings were bound to run out of momentum and the shares were going to be punished.

A quick look at earnings forecasts for this year shows that most analysts stopped raising their estimates back in October and since then one or two had actually cut their numbers.

WHAT DO THE EXPERTS SAY?

‘If it looks too good to be true, it probably is. That is certainly the moral of the story with Plus500 which has issued a major profit warning because of tighter European regulation around the types of trading instruments it markets to retail investors,’ says Russ Mould, investment director at AJ Bell.

‘Plus500 has looked like an anomaly for some time. While its peer group have all had to downgrade earnings expectations because of tighter rules on contracts-for-difference - a high-risk way of betting on stocks, currencies, commodities and cryptocurrencies - Plus500 delivered a series of statements that kept saying it would beat earnings forecasts. Its run of good luck has come to an abrupt halt.’

Mould says owning Plus500 shares has effectively equated to taking a double dose of risk. ‘Firstly, you’ve had the risk of your money being in the stock market. Secondly, your money has gone into a business which operates in high-risk products.’

He adds: ‘In good times, investors will have sought superior returns. But in bad times, like now, investors will have to sadly stomach chunky losses. It provides a stark reminder for investors to know exactly what they are getting themselves into.’

EARNINGS DOWNGRADES

Liberum has pushed through large downgrades to its earnings forecasts. Adjusted pre-tax profit estimates have been slashed by 18% to $268m which is significantly less than the $503m achieved in 2018. The broker also reduces its 2020 pre-tax profit forecast by 18% to $340m.

Shareholders may also have to stomach a large drop in the dividend with Liberum slashing its 2019 forecast by 54% to 83p and reducing 2020’s estimate by 46% to 106p.

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Issue Date: 12 Feb 2019