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CMC Markets (LSE:CMCX) has lit up the FTSE 250. And anyone who invested £5,000 in the stock a year ago would now have around £16,500, with dividends sprinkled on top.
Indeed, no other mid-cap share has beaten CMC’s eye-popping 229% return over 12 months. However, I think it can keep going higher in the years ahead. Here’s why…
What does CMC do?
As a quick reminder, CMC Markets was founded in 1989 by Lord Peter Cruddas, who returned as CEO in 2013. It operates as an online trading platform specialising in retail derivatives (particularly CFDs), stockbroking, and institutional white-label trading technology.
A CFD (Contract for Difference), by the way, lets you speculate on the price movement of assets, such as shares, without owning the underlying asset.
Historically, the company’s profits would spike when markets were volatile and trading volumes went up. In FY21, for example, when retail trading exploded during pandemic lockdowns, net operating income surged 63% year on year to £410m, while pre-tax profit skyrocketed 127% to £224m.
Then things settled and trading volumes dropped, along with profits and the share price. Indeed, from 2021’s peak to 2023’s trough, the stock lost 83% of its value!
B2B platform-as-a-service
More recently however, the firm has been having great success with its business-to-business (B2B) offer. This allows banks and FinTechs to integrate CMC’s proprietary multi-asset trading and clearing technology directly into their own apps.
As such, CMC has become an infrastructure layer sitting behind financial platforms. And some of these are major players, including ANZ Bank, Westpac, ASB Bank, and Revolut.
The key thing here is that B2B provides high-margin recurring fees. As such, it’s easy to see why investors are bullish.
We are no longer just a traditional retail CFD provider. CMC is now a platform business built for multi-asset trading and institutional partnerships. Revenue is driven by B2B and wholesale…Importantly, the scale and profitability of our institutional and B2B business now gives us the ability to reinvest back into retail brand and client acquisition.
Lord Cruddas
Risks to bear in mind
As always, there are risks. While operations are becoming more diversified, a drop-off in trading activity during quieter markets could result in softer earnings. There may also be increased regulation in some markets, focused on people losing money from speculative trading.
And if interest rates start falling, CMC would earn less interest income from both clients’ and its own cash (it generated £41.4m in net interest income last year).
Low valuation
Weighing everything up though, I think the stock’s worth considering. It’s trading at just 10 times forward earnings while also offering a 4.1% dividend yield.
City brokers agree. Peel Hunt, for instance, recently gave the stock a 900p price target – roughly 31% higher than today’s level.
We think a business where partner-led revenue is growing at more than twice the rate of direct business warrants more than that [the current valuation].
Peel Hunt
Someone else who sees great value is the chief executive. Earlier this month, Lord Cruddas bought 747,389 shares for £4.8m.
I’m waiting for CMC’s half-year results next month with interest. In the meantime, here’s another stock that lit up the FTSE 250 a while back before advancing to the FTSE 100…
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Ben McPoland has no position in any of the companies mentioned.
This story originally appeared on Motley Fool
