On Monday, Shopify (SHOP 0.15%) became the latest stock to announce a stock split, following a slew of other big tech names. Pending shareholder approval, shares will be divided 10-to-1 to shareholders of record as of June 22.
Stock splits don't change the value of the underlying business; however, a lower price per share could be a plus for both retail investors and employees who receive shares of stock, as their stakes become easier to buy and sell amid increased liquidity.
Shopify was up more than 2% on the news on a down day for the markets. But will this jump last more than today?
Recent history of tech stock splits
Technology peers Alphabet and Amazon.com each announced their splits recently, and another Warren Buffett favorite, RH, announced a 3-for-1 split with its recent earnings report as well.
None of these names have split their stock yet, but usually the announcement leads to some enthusiasm. Yet there really isn't a consistent pattern in terms of performance beyond one or a few days. Here is each company's performance relative to the S&P 500 index after their respective announcements:
It's hard to make projections based on each stock's reaction to their announcements. Both Alphabet and RH made their announcements in conjunction with their earnings releases, while Amazon issued a stand-alone press release after it had already reported. That being said, Amazon also announced a hefty share repurchase program in conjunction with its report, perhaps accounting for its outperformance. RH announced its split in conjunction with extremely cautious guidance, which likely played more of a role in its decline. One could even argue that the stock split prevented RH from falling further.
So while Shopify's one-day outperformance is nice, investors shouldn't expect it to last as it fades into yesterday's news. Of course, the real test will happen once these stocks do execute their splits. None of the aforementioned companies have done so yet.
Why Shopify's stock split bothers me (a little)
In conjunction with the split, Shopify also announced it would be making some changes to its dual-class share structure. Shopify's B shares are primarily held by CEO Tobi Lütke, his family, and early investor John Phillips by way of his company Klister Credit Corp., which he co-owns with his spouse. B shares don't trade and have 10 times the voting power of A shares.
In conjunction with the announcement, Phillips announced that his holding company will be converting its B shares to A shares. That conversion will increase the A shares' voting power from 49% to 59%. So, assuming Phillips always voted with Lütke on important matters, the conversion lowers the voting power of the B shares and therefore Lütke's control.
To preserve Lütke's power over the company, Shopify is therefore issuing Lütke one "founder share," which will basically provide Lütke with 40% voting power, when combined with his other A and B shares. Per the press release, that's about the level of Lütke's voting power after Phillips' conversion. However, last year's management circular had put Lütke's individual voting power at 33.9%, so this could actually be an increase of his individual control -- albeit short of a majority.
As a condition of his founder's share, Lütke must remain with the company and may not sell more than 70% of his currently held B shares (or equivalent A shares, should they convert).
Is Phillips about to sell shares?
In the press release, John Phillips said this:
In the fifteen years since Catherine and I first invested in the Company, we have been impressed time and time again by what this team is capable of achieving under Tobi's leadership. Since the Company's IPO, Shopify Class A shares have increased in value from $17 to more than $675 as of March 31, 2022, resulting in total shareholder returns of over 3,850%, significantly outpacing the broader market. My fellow directors and I are confident that shareholder approval of this proposal will provide Shopify with new tools to position the Company for long-term success as it builds on its impressive track record of value creation with Tobi at the helm. Klister's plan to convert all of its Class B shares, which will result in a loss of its multiple voting rights and the ability to make intergenerational transfers of Class B shares, is intended to help facilitate a smoother transition to the new structure, which I wholeheartedly endorse as being in the best interests of the Company and fair to minority shareholders. I encourage all Shopify shareholders to vote FOR this proposal at the Annual and Special Meeting.
While there may be something I'm missing, there are likely two reasons Phillips is converting his shares; One, he wants to sell some stock, which is only possible via A shares, or two, it could really be about cleaning up the dual share structure, perhaps signaling his retirement from Shopify's board of directors.
This is why the split announcement is a bit worrisome. As we all know, stock splits can lead to increased buying from retail investors that may not have the $620 to shell out for an individual share of Shopify. However, if a major shareholder is planning to sell, the split could push the price higher than it might otherwise be, allowing the seller to get a better price.
That's not to say shares are overvalued; there are many reasons Phillips may want to sell today. His family has made a huge amount of money in Shopify, and he may be looking to diversify his holdings. It's also possible he might not sell shares anytime soon, even though it's a stronger possibility post-conversion.
Is this something to worry about? Over the long term, Shopify will rise or fall based on its fundamentals. Obviously, management has been excellent operators and stewards of investor capital thus far, so I don't necessarily think they are trying to pull one over of shareholders. Just don't be surprised if you see Phillips selling stock over the next few months when the shares split.
If you believe Shopify is a good value today regardless of this information, I wouldn't worry too much about potential sales or Lütke's control of the company. But the potential for a large shareholder to sell into a stock split is something investors should at least be be aware of.