Hot on the heels of similar moves from some other high-profile companies, Shopify (SHOP -2.37%) this week announced plans to carry out a 10-for-1 stock split. That maneuver won't do anything to boost the intrinsic value of the e-commerce services leader, but it could make the stock more attractive and accessible to retail investors.
Split announcements have recently added to the bullish momentum of companies including Alphabet, Amazon, and Tesla, and it won't be surprising if Shopify gets a valuation boost out of this in the near term. However, the company stands out as a great long-term investment, and there are at least three great reasons to buy its shares ahead of the stock split.
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1. Shopify stock trades at a massive discount
Shopify's core business is providing services that help businesses of all sizes launch and expand their own e-commerce operations. Demand for those services skyrocketed when pandemic-related social distancing and shelter-in-place restrictions were at their most intense, but the business is facing some tough year-over-year comparisons as it laps those periods of pandemic-driven growth. That has led some traders to sell the stock.
Factors including high inflation, an increasingly hawkish Federal Reserve fiscal policy, the war in Ukraine, and rising Treasury bond yields have also combined to create a more challenging environment for growth stocks. Shopify's valuation has been slashed as investors have generally become more risk-averse. Adding another bearish catalyst is news that Alphabet plans to make a much bigger push into the e-commerce space with a last-mile logistics offering.
While Shopify stock has been trending downward since late last year, the shares now trade at attractive levels for long-term investors.
SHOP data by YCharts
In addition to being down by roughly 55% across 2022's trading, Shopify is also off roughly 65% from the high it hit in November. Trading at roughly 13 times this year's expected sales and 190 times expected earnings, it clearly still has a growth-dependent valuation, but there are good reasons to believe it can deliver strong returns from here.
2. E-commerce expansion is still just getting started
Given how much e-commerce has already grown and how ubiquitous it is nowadays, it would be easy to overlook how much room it still has for expansion. Consider, for example, this chart.
Even though the U.S. e-commerce market might intuitively seem somewhat mature, it is projected to grow at a greater than 14.5% compound annual rate through 2025. Consider as well that Shopify has huge opportunities for expansion in foreign markets.
Its growth this year will naturally look a bit muted when compared to the explosive levels of 2020 and 2021, but the opportunities here are far from exhausted. Shopify management still expects the company's growth will outpace that of the e-commerce market at large in 2022, and the business continues to have an incredible long-term outlook.
3. The split gives more power to a visionary executive
Founder and CEO Tobias Lütke has done an absolutely fantastic job guiding Shopify from its infancy to its current leadership position in e-commerce services, and a move that will solidify his long-term control over the company is something that shareholders can be excited about.
Shopify's proposed 10-for-1 stock split will also be accompanied by the creation of a new class of shares. When the newly proposed Founder share is launched, it will increase the fraction of voting power held by the Lütke family to 40% -- essentially, permanently.
A vote on this unusual provision will take place at the company's upcoming annual shareholders' meeting on June 7. In addition to protecting the company from the possibility of hostile takeovers, it will generally give Lütke more power to determine the direction of the business.
Even in the wake of its dramatic recent declines, Shopify stock is still up by more than 790% over the last five years, and visionary management has played a huge role in powering those incredible returns. Shopify has a massive and fast-growing addressable market to expand into, and it's encouraging that Lütke will have more power to continue steering the ship.
