Shopify’s WEIRD 10:1 Stock Split Provision
Stock splits are not uncommon. There have been dozens of announcements this year alone, including Alphabet’s 20-for-1 stock split and Tesla’s 5-for-1 stock split.
Shopify is another large company that recently announced a 10-for-1 stock split, which will take place in June 2022. However, this split comes with an unusual provision. The goal is to help CEO Tobi Lütke maintain control over the company he founded — a company leading the world of digital retail.
As an investor, here’s what you need to consider.
A Look at Shopify’s Stock
Like many tech stocks, shares of Shopify (NASDAQ:SHOP) have taken a beating lately. Despite that, Shopify has continued to receive a buy rating from most analysts. And it’s not hard to see why.
Shopify gets an A+ when it comes to growth, profits, and cash flow. Top line sales have grown massively over the past 5 years:
- 72.9% (2017)
- 59.4% (2018)
- 47.0% (2019)
- 85.6% (2020)
- 57.4% (2021)
Gross profits have held firm north of 52% over the same period. And net income went from -$40 million in 2017 to $2.9 billion in 2021.
Should You Buy Shares of SHOP Now or After the Split?
It’s important to note that stock splits do not change anything about a company’s business. However, it’s not uncommon for splits to generate buzz, and since shares become more affordable, this strategy can entice more investors to buy into the company.
Since this will be a 10-for-1 split, shareholders will receive 10 shares following the split for every one owned pre-split. Post-split, each share will be priced at 1/10th the amount it was pre-split.
Following its recent tumble, many investors wonder why split shares now? If Shopify wanted to make its shares more affordable, wouldn’t this have been a better move back when shares were selling for $2,000+ each?
Shopify’s Stock Split Is Slightly More Complicated
SHOP’s upcoming stock split is not about a simple division to create more stock and greater affordability. Although that will be the case, the company’s plan is more intricate.
Currently, Shopify has two classes of shares — Class A shares and Class B shares. The B shares have around a 51% controlling interest, and of the 11.9 million Class B shares issues, Tobi Lütke owns 7.9 million of them. An additional 3.7 million Class B shares are owned by Klister Credit (half-owned by John Phillips), who serves on the board of directors.
The latest stock-split plan will create a new class of shares, called the Founder shares. When combining Lütke’s Class B shares and this new class of shares, the move will give him and his immediate family 40% of the total voting power of Shopify shares. This structure would protect the company from unsolicited takeover bids.
For this new proposal to pass, at least two-thirds of the Class A and Class B shareholders (excluding Lütke) will need to approve it.
Lütke has demonstrated strong management skills in the past, contributing to the company’s stellar returns. If the stock split passes, Lütke will be able to carry out his long-term vision for the business. As an investor, it’s reassuring to know that a founder is so passionate about his company — especially when that founder has a track record like Lütke.
For that reason, many investors support this plan and want Lütke to remain invested in Shopify for years to come.
Should I Buy SHOP Stock Before the Split?
As discussed, the stock split will not change the value of shares. For example, if one share is selling for $600 at the time of the split, that share will turn into 10 shares worth $60 a piece. So, the pie is the same size — it just has more slices.
A pending stock split is not a reason in itself to buy. Instead, you should consider the potential future of the company. When considering the strength of Shopify’s business, there are many reasons to be bullish.
When looking at the numbers and the potential of the e-commerce industry, SHOP is a Buy. As reported by Shopify, total revenue for the full year of 2021 was $4,611.9 million, a 57% increase over 2020. Subscription Solutions revenue grew 48% to $1,342.3 million and Merchant Solutions revenue grew 62% to $3,269.5 million.
In addition to the recent correction in tech stocks, SHOP stock tumbled based on fears of slowing e-commerce growth. Although global e-commerce sales hit record numbers last year, this industry is expected to grow 13% to $5.5 trillion in 2022, and surge to $7.4 trillion by 2025.
If you don’t have the option to buy fractional shares and do not have the cash to buy shares at the current price, by all means, wait for the split. Shopify is an industry leader, and as a long-term investor, there are plenty of reasons to be excited about this stock for years to come.
If you do have the option to buy fractional shares, SHOP’s share price is down more than 65% from its peak, so the time is ripe to jump on board SHOP if you’ve been waiting on the sidelines.
