After both Amazon and Alphabet announced stock splits earlier this year, other companies splitting their shares have been generating lots of hype. That being said, stock splits don't change anything fundamentally for a business. A share of a company represents a piece of the pie, so to speak. Therefore, a stock split is simply creating more slices of the pie by cutting up each piece into smaller ones.
Canadian e-commerce company Shopify (SHOP -1.01%) wants to get in on the action, announcing that it will ask shareholders to vote on a 10-for-1 split. By doing this, Shopify would create a third class of shares for its CEO and founder Tobi Lütke, giving him more voting power and authority over the company.
Many investors might be considering an investment in Shopify because of the potential stock split, but they should focus on the fundamentals of the business rather than this news. The fundamentals, however, are strong, which is why Shopify may be a good buy today, whether it splits its shares or not.
1. E-commerce is in the early stages
The global e-commerce industry is relatively young, and Shopify has plenty of opportunities to capitalize on that. According to Statista, e-commerce represented 19.6% of all global retail sales in 2021. However, it is expected to increase to 24.5% by 2025 and will likely keep growing after that.
Global e-commerce leaders should benefit from the industry expanding at such a rapid rate, and Shopify is one of those leading brands. The company doesn't sell goods directly but facilitates commerce activity for businesses, collecting transaction and subscription fees in the process. With all of its customers combined, the company controlled 10% of all U.S. e-commerce sales in 2021. This demonstrates its leadership as the primary platform for small- and medium-sized businesses (SMBs) to build their e-commerce operations.
If you think the SMB space is not a fruitful endeavor, you're wrong. The company estimates its total addressable market in this niche is worth $160 billion.
2. SMB's preferred platform
Shopify has become a leading platform by developing an all-in-one solution for smaller businesses to help them expand their reach. Shopify offers products for everything from setting up an e-commerce storefront to marketing it. The company even has services like Shopify Capital, where businesses can get loans to help fund growth.
Unlike Amazon, Shopify's incentives are aligned with its customers since it benefits when its customers continue to expand their businesses. On the other hand, when a small business sees success on Amazon's platform, the company has controversially created a similar, competing product and promoted it, making it hard to thrive on the platform.
Shopify doesn't sell products in that vein. Rather, its sole job is to help merchants succeed. Considering the majority of Shopify's revenue comes from transaction fees, the company makes more money when its customers make more money.
Shopify also has a relentless focus on innovation. It frequently has new services and initiatives to roll out. Recently, it made international expansion easier by partnering with JD.com -- China's largest e-commerce platform. Now, Shopify merchants can sell on that site, tapping into a massive market . The company is also building out a fulfillment network across the U.S. so businesses can ship their products more easily. These efforts only make its platform stronger and stickier, making it harder to leave.
3. Shopify is a bargain
The last reason Shopify should look appealing right now is because of its relatively cheap valuation. The company trades at 16 times sales -- a valuation the company hasn't seen since early 2019. It's fallen primarily because of the weak outlook it gave for the first half of 2022, when it expects to see its slowest growth of the year in the first quarter.
Another risk to consider is the company's profitability. Shopify reported $2.9 billion of net income in 2021, but almost all of that came from investments it holds in Affirm and Global-E. Excluding the gains on those investments, the company's operating income was just $269 million.
That said, Shopify generated nearly $454 million in free cash flow last year. Over the long term, the company can use this cash generation to keep innovating and improve the merchant experience on its platform.
Because of the company's competitive advantages, sticky product suite, and attractive valuation, I see today as a great buying opportunity for Shopify. The potential stock split doesn't impact the actual business in any way, so that shouldn't change your investment thesis.
However, Shopify is a leader in a massive, lucrative industry. With its valuation near a multiyear low, the stock looks like a smart pick today.