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IG and Plus500 venture overseas with mixed success
IG is on track to generate revenue of nearly £90 million per annum from its operations in Japan. This equates to approximately 20% of Plus500 full year expected 2022 revenue, and provides an indication of the size of market opportunity that the it represents.
Plus500’s move into the Japanese market follows its decision in July 2021 to enter the American futures market with the $30 million acquisition of Cunningham.
However investors recently took fright at the slowdown at IG’s Tastytrade, its American online brokerage platform, announced at its recent trading update on March 16.
This has rekindled concerns that IG overpaid for Tastytrade, and highlights the potentially precarious nature of overseas acquisitions.
Plus500 is entering the Japanese market through the purchase (for an undisclosed sum) of EZ Invest which is licensed as a Type 1 Financial Instruments Business Operator. Its offerings include CFDs (contract for differences), and OTC (over the counter) foreign exchange.
The rationale is to scale the business up by leveraging Plus500’s technology and marketing expertise. This mirrors the strategy adopted with the group’s entry into the American market last year with the acquisition of Cunningham.
The market was spooked by IG’s recent management guidance that revenue growth for Tastytrade will miss the previously guided 25%
to 30% revenue growth target for 2022.
The reduced guidance for Tastytrade accompanied an otherwise positive trading update. However the market marked the shares down on the news.
At the time of the Tastytrade acquisition (it completed in June 2021) there were fears that the $1 billion price tag was excessive. However the deal was justified on the basis that the US options and futures market was the largest in the world, commanding high margins.
However US options trading volumes have slowed, a trend that has continued into the start of the fourth quarter, prompting management’s cautious guidance.
The lowering of management revenue guidance for Tastytrade re-opens the debate over whether IG paid over the odds for an asset that was a transitory beneficiary of the pandemic.
With consumers forced to work from home Tastytrade benefited from the sharp uptick in individuals trading.
Now that normal activity has resumed, there is a fear that the long-term structural growth outlook for Tastytrade will be more muted than current analysts’ expectations.