There's no question that Shopify (SHOP 1.11%) has democratized the world of digital retail. By providing everything entrepreneurs need to sell their goods online, the company has staked out a large and profitable niche for itself and enriched investors in the process.
Shopify's stellar business performance opened the door to a surging stock price. Shares gained roughly 200% over the past three years and nearly 800% over the preceding five years. Furthermore, since Shopify's IPO in May 2015, the stock has soared by 2,280% (as of this writing). It's worth noting that the stock has achieved those gains even in light of a recent sell-off, with shares dragged down in conjunction with the recent correction and tech-centric bear market.
To kick off the week, Shopify announced the first stock split in the company's history -- which contains an unorthodox provision to help maintain CEO Tobi Lütke's control over the company he founded.
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The details of the split
In a regulatory filing that dropped Monday, the company said its board of directors had approved a 10-for-1 stock split. Shopify plans to seek shareholder approval for the measure, which will result from amendments to its articles of incorporation, as part of a vast overhaul of its governance structure. The vote will take place at the company's upcoming annual and special meeting of shareholders, which will be held on Jun. 7, 2022.
In an unusual move, Shopify will introduce a new class of shares, dubbed the Founder share, which will provide Lütke with a variable number of votes. This new class of shares, when combined with the Class B shares owned by Lütke and his immediate family, would comprise 40% of the total voting power of Shopify shares and maintain it at the level in perpetuity. It's important to note that the CEO currently holds a 6.5% stake in the company. The proposed share structure would protect Shopify from unsolicited takeover bids.
Lütke would be forced to relinquish the shares in the event he was no longer a Shopify executive, board member, or consultant. He would also be prohibited from transferring the Founder share to any other party, including family members.
In order for the proposal to pass, it will need to be approved by at least a two-thirds majority of the Class A and Class B shareholders (excluding Lütke). Assuming Shopify investors approve the measure, shareholders of record as of Jun. 22, 2022 will receive nine additional shares of stock for each share they own, after the market closes on Jun. 28.
Shopify investors won't be required to take any additional action in order to take part in the stock split. The normal process involves brokerages handling the details behind the scenes with the additional shares simply showing up in investor accounts.
It's worth noting that the newly issued shares may not appear immediately on Jun. 28. The timetable varies slightly from brokerage to brokerage and as such, it can sometimes take several days for the new shares of stock to make their appearance.
Let's add some numbers to the equation to provide some much-needed context. For each share of Shopify stock investors hold -- currently trading for roughly $600 per share -- post-split, shareholders will own 10 shares worth $60 each.
Does the stock split mean Shopify is a buy?
As the above example illustrates, the total value of the shares held by investors won't change in value as a result of the stock split. One share of Shopify stock priced at $600 is worth the same as 10 shares worth $60 (10 x $60 = $600). To use the pizza analogy, it doesn't matter how many slices you cut a pizza into, you still have the same amount of pie to eat. Similarly, Shopify stockholders will simply have a greater number of lower-priced shares.
Consequently, a pending stock split alone is no reason to buy stock. Rather, it's the strength of the underlying business and the potential for future share price gains that should be the major consideration when deciding whether or not to invest in a company -- and there are plenty of reasons to be bullish on Shopify.
Revenue grew 57% year over year in 2021, a remarkable feat considering its top line increased 86% in 2020, fueled by pandemic-related tailwinds. It's also a telling sign that gross profit grew 61%, outpacing revenue growth, as the company was able to leverage its growing scale to drop more to the bottom line. To that end, adjusted net income surged 66%.
Shopify shares have taken it on the chin recently, with the stock down 64% off highs reached late last year. The decline was fueled by the recent correction in tech stocks and fears of slowing e-commerce growth. Yet even after record adoption last year, global e-commerce sales are expected to grow 13% to $5.5 trillion in 2022, surging to $7.4 trillion by 2025.
This represents a large and growing opportunity for Shopify and that, combined with its industry-leading position, is a compelling argument to own shares.
