After today's 15% rise, is Plus500 Ltd a better investment than BT Group plc?
Plus500(LSE: PLUS) was one of the top gainers on Wednesday after the CFD provider released a positive year-end trading update. It showed that the strong momentum of the first part of the year continued into the final quarter, and means that its performance for 2017 was ahead of expectations.
However, does its 15% share price rise mean that it is now overvalued given the risks that the industry faces? Could BT Group(LSE: BT-A), which has seen its share price hurt by regulatory issues, prove to be a better investment?
Plus500's final quarter of 2017 was a record one in terms of revenues and customer acquisitions. This helped to push the figure for customer acquisitions to 246,000 for the year, which is a significant increase on 2016's 104,432. Part of the reason for the company's strong performance was the popularity of its cryptocurrency offering. Its products allowed customers to participate in the volatility of multiple cryptocurrencies without owning the underlying asset. This trend could continue in 2018.
However, the outlook for the company remains unclear. Regulatory changes look set to be put in place in the EU and possibly in the UK, with there being a general trend towards greater protection for private investors. This could take the form of more limited advertising by Plus500 and its sector peers, with bonuses and offers being more restricted. Increased regulation may also mean that the amount of leverage which can be utilised by investors may also be scaled back.
Of course, Plus500 is not the only company that has experienced potential regulatory issues. BT's shares were hit hard last year by the accounting scandal in Italy and its potential fallout. They have never fully recovered from that decline, with investors being unsure about the costs involved in purchasing EE as well as developing the BT pay-tv offering. The latter has required major investment in sports rights which could have a long payback period.
Following its share price fall, BT now trades on a price-to-earnings (P/E) ratio of 9.8. Clearly, this suggests that investor sentiment is at a low ebb and with the company's bottom line due to rise by just 2% in the current financial year, a clear catalyst seems to be lacking. Certainly, the company may have a dividend yield of 5.7%, but a lack of sustained profit growth may mean dividend increases are small.
Plus500 also has a relatively low valuation. It trades on a P/E of just 9.2, which signals that investors may have already priced in potential difficulties for the business arising from regulatory change. While such changes could be detrimental to the future performance of the business, the company may be able to adapt in order to deliver improving levels of profitability in future. Therefore, while relatively high risk, the potential returns from Plus500 appear to higher than those for BT.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.