Through Covid-19, there have been numerous known beneficiaries. These have primarily been companies involved in the tech space as the crisis has caused an acceleration in the consumer shift in spending, with companies such as Etsy, Amazon, Chewy all benefiting massively from it. However, there has also been another industry which has been a huge Covid-19 winner and I believe will continue to win in the near to medium term future and that is the CFD industry.
As volatility gripped the markets, investors wanted to trade and CFD firms were there to provide those services in the U.K. and across Europe. Not many benefited from this more than CMC Markets which has now seen a huge turnaround in fortunes since the 2018 regulatory industry crunch which caused revenues to cripple. Whilst I favour the industry as a whole, I believe CMC has some of the best long-term prospects and I will outline why in this article.
It is clear right now that the market feels as divided as it will ever be. Many people are speculating that we will now enter a multi-year bull-run with a clear way out of the crisis after numerous successful vaccines from Pfizer, AstraZeneca and, more recently, Moderna. However, there is also a huge and increasing amount of speculation that the markets appear very toppy right now and that a crash or bear market will soon ensue. With all this speculation it can be difficult to position your portfolio effectively for the coming months and years.
This is why it is becoming increasingly important to have some form of hedge to broader market volatility in your portfolio. As I have mentioned, CMC has been a Covid-19 winner and will benefit massively from any future crashes or spikes in volatility. More recently there has been a surge in interest for newcomers wanting to get involved in the markets and players such as CMC and IG are ready to provide their services.
Exceptional 2020 performance and long-term potential
CMC delivered some truly exceptional results in FY2020 with revenues soaring by 93% to £252 million and profitability increasing to £98.7 million - up from just £8.7 million in the prior year. This has reinforced CMC’s scalability potential and proved how profitable the entity can be, particularly under volatile circumstances. It’s also important to note that these results included just 2.5 months of Covid-induced volatility - volatility has completely changed the long-term viability of CMC’s business.
Looking into the new financial year the company has continued to deliver exceptional results across the board with £230 million of revenues in H1 alone and a profit before tax of £141 million. This means CMC showed profit margins of over 60% in H1. As shown by CMC’s share price action over the last year, the continued stellar trading performance and elevated levels of volatility have surprised the market as back in March 2020 no one really expected volatility to remain elevated for so long. All of this has continued to feed into improved cash generation for CMC to expand both their geographical presence and also improve product quality.
Whilst more recently volatility across the board has started to abate, the long-term benefits CMC is going to receive from Covid are huge. This is where the long-term viability has now been created. CMC now has more clients than it ever has with client retention rates remaining above 80% in Q3 - the company is doing a really good job at maintaining these clients. The number of active clients at the end of H1 was 59,000 compared to 41,000 the previous year. The total revenue of each client in H1 is also 66% higher than the previous year. CMC is onboarding very valuable clients. The client levels are still relatively low in comparison to peers such as IG who have well in excess of 100,000 - meaning CMC still has such great potential ahead of it to capture greater market share.
It is through these clients that CMC will create recurring revenues and a loyal client base. The company now has loads of cash to reinvest into its B2B platform which is its institutional offering. CMC is unique in this aspect as it is developing a two-sided business model to build numerous revenue streams and expand internationally. CMC is the only listed CFD company to have a clear focus on developing its B2B product. Currently, the B2B product provides just 20% of revenues but is also growing at a fast pace. This is particularly true for the stockbroking B2B offering which saw revenues nearly double to just over £20 million in the first half.
Considering all of the above, CMC appears very good value with a P/E ratio of just 7x. Whilst I do expect there to be a fallout in terms of revenue as volatility starts to abate - there is still much uncertainty right now in the market that CMC will continue to directly benefit from. In fact, the company has recently boasted strong platform performance over the last month in comparison to IG which had to stop welcoming new clients due to elevated traffic levels and in order to focus on the current client cohort. This showed the strength of CMC’s product in times of intense pressure.
It can be hard to find shares with the growth rates of CMC and such a lucrative valuation. Much of this is attributed to the risk that the industry faces in terms of regulatory crunches. I believe that these risks, particularly over the near term are overstated. Whilst bodies such as the FCA will look to protect private investors from products they don’t understand, much of the worst damage has already been done in that department.
Previous regulatory crunches in 2016 and 2018 from the FCA and ESMA have already heavily reduced client leverage. CMC is now in a position where it is set to deliver a record year in 2021 in an industry that's in the healthiest state it's ever been in. This is also backed up by the recent ‘power to the investor’ movement that has arisen due to the Gamestop and AMC related mania. Investors now want the power to trade when they want and how they want. The FCA taking measures would infuriate the public more than it would help them I believe.
Overall, I still see a good opportunity in CMC shares at current levels, even after the 160% runup in share price over the last year. Shares still remain cheap with CMC becoming a cash cow and now having the ability to reinvest into its platform more heavily than ever. The company has a large cohort of clients and is perfectly positioned to continue to onboard new clients over the long run. The company also has a clear strategy of developing numerous revenue pipelines through developing a strong B2C and B2B client base.
I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions.