Shopify (SHOP 1.61%) became the latest tech stock to announce its stock is splitting, stating it would split its shares 10-for-1. This means for every share an investor owns, they will receive 10 shares, causing the shares to drop by a similar ratio in price.
Although it follows stock split announcements in recent weeks by Alphabet, Amazon, and Tesla, it's still a curious decision by Shopify, considering its shares have lost nearly two-thirds of their value over the last five months.
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If it had wanted to split its stock to make its shares more affordable to investors, doing so back in November when they were trading north of $1,700 a share would have been a more appropriate time, not when they've tumbled to just above $600 a stub.
So, what's behind Shopify's move? Is it just a ploy to distract shareholders from their losses, hoping the news would give the stock a much-needed bounce (shares did jump $14, or 2.4%, on the news), or is there something more to the move? Let's dig in to find out.
Not all stocks are created the same
Shopify's stock split is not just a simple division to create more stock and lower the share price for affordability. While the result will be the same, taking shares from around $600 apiece down to around $60 each, it's actually a more complicated plan.
Currently, the e-commerce platform provider has two classes of shares: the Class A shares, which have one vote per share, and the Class B stock, where each share gets 10 votes. The B shares have about a 51% controlling interest, meaning whoever owns those shares ultimately decides the fate of the company and the direction it takes.
Of the 11.9 million Class B shares issued, Shopify's founder, chairman, and CEO, Tobi Lütke, owns 7.9 million of them, representing more than one-third of the voting power of all shares outstanding. Klister Credit -- an investment and consulting firm 50% owned by John Phillips, who serves on the board of directors -- owns over 3.7 million Class B shares.
Under the stock-split plan, Shopify intends to create a new class of shares called the Founder share, which will be issued to Lütke and will give him about 40% of the voting power, which the company says reflects the total he, his family, and his affiliates currently enjoy. At the same time, Phillips will convert all the Class B shares Klister owns into Class A shares if the proposed split is approved by shareholders at the June 7 meeting.
Equally important, Lütke's Founder share will only apply as long as he is actively engaged with the company. If he no longer serves in an executive capacity, on the board, or as a consultant to the company, then the new shares will sunset, and he will be required to convert his stock into Class A shares. Lütke is also prohibited from passing on his Founder share to a third party.
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A more perfect union
Shopify said the purpose of the split and the issuance of a new class of stock was to "modernize Shopify's governance structure" and position it to take advantage of new global opportunities. It cements Lütke's position with the company and reaffirms his critical role in leading Shopify forward. It's hard to disagree with the assessment.
Shopify is still enjoying strong growth, even if it's not at the same meteoric pace set during the depths of the pandemic. Fourth-quarter revenue grew 41% to $1.3 billion and was up 173% compared to what it reported in 2019 when revenue grew to $505 million, a 47% year-over-year increase at the time. It's also becoming a vertically integrated, one-stop shop for entrepreneurs and mid- to large-sized businesses.
It launched a merchant money management account, a small business loan boutique, and a fully hosted enterprise e-commerce platform for fast-growing brands. In addition, it will soon offer non-fungible tokens, or NFTs, to help businesses and brands better connect with customers.
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The stock split and governance reorganization simplify the structure and provide Lütke with the same power he had within the company previously but give Class A shareholders -- the stock small retail investors own -- the majority say in the future of the company. Institutional investors and Klister will still have an outsize say in Shopify's direction, but it's a more democratic position than it was previously.
A good deal
Stock splits seem to be the current fad among tech stocks, and though they're considered bullish indicators, they don't affect the actual business or an investor's ownership interest. It's the same pie, just cut into 12 slices instead of six.
Shopify's own plan lands in the middle of this trend, though it's not for the same reasons Alphabet, Amazon, and Tesla have chosen. Arguably, it's for a better one, and investors should support it.
