Shopify (SHOP 4.00%) completed its 10-for-1 stock split after the June 27 trading session. The Canadian e-commerce platform company had traded at over $1,700 per share briefly before the split. Even though it sold in the $300-per-share range by the time the split occurred, the high nominal stock price spoke to the stock's potential.
After the split, Shopify trades near the $33-per-share range. But given Shopify's moves in its industry, this lower nominal price could give an added boost to this e-commerce stock.
The nature of stock splits
At a basic level, a stock split neither helps nor hurts Shopify stockholders. One share at $330 per share holds the same value as 10 shares at $33 per share. The split does not affect the market cap or other valuation metrics. For example, its price-to-sales ratio was not affected and stands at about 9. Other metrics such as earnings per share adjust relative to the new value of the shares.
Additionally, stock splits are not a universally loved strategy. Perhaps no company outlines the controversy better than Berkshire Hathaway. CEO Warren Buffett is not a fan of splits, and even though the cost of A shares exceeds $400,000 per share, he has not split those shares. However, he allowed for the issuance of B shares. Those shares have split at various times, though they do not hold the equivalent voting value of the A shares.
Why shareholders may benefit anyway
While a stock split has no direct effect on the intrinsic value of a company, Shopify's split may benefit it in some indirect ways. For one, high share prices can hurt liquidity, or the ease of buying or selling shares. Due to the high price, trading of the Berkshire Hathaway A shares showed a 30-day average daily volume of about 2,200. This can make trading shares more difficult. In contrast, Shopify's average trading volume over the same period averages nearly 6.4 million shares post-split. This means that small investors do not have to bid significantly above market to buy shares.
Not surprisingly, more small investors can now buy Shopify stock after the split. Some of them may start with a $1,000 budget, and others even less than that. Many of these investors could not afford a full share at the pre-split price of around $1,700 per share.
Admittedly, small investors could have purchased fractional shares, depending on the broker they use. Still, those arrangements often come with added fees, making such shares less appealing. Thanks to the split, Shopify's small-scale investors can avoid this issue.
The Shopify value proposition
These small-scale investors may also buy due to Shopify's potential to move higher. Yes, numerous companies sell e-commerce platforms. However, Shopify has emerged as No. 1 in the U.S. market, according to Oberlo, beating out peers such as Wix, Squarespace, and WordPress add-on WooCommerce.
In addition to software offerings, Shopify has built a more extensive ecosystem, venturing into areas other software providers have not entered. This includes Shopify Capital, a provider of funding to businesses, and Shopify Payments, which can handle transactions without needing a third-party provider.
Still, the most significant add-on may come from the Shopify Fulfillment Network. This takes Shopify far outside the software industry as it stores, packages, and ships goods for clients. Amazon is the only other major e-commerce enterprise to venture into the client services side of this business in the U.S., meaning Shopify offers the most extensive ecosystem for enterprises wanting to sell items without the involvement of Amazon.
Shopify after its stock split
Shopify's stock split is a likely win, at least for small investors. Although it changes nothing fundamentally, the lower nominal price makes Shopify a more appealing option to more shareholders. Moreover, the Nasdaq Composite bear market means that these investors can buy Shopify at a massive discount. As long as Shopify continues to stand out among its competitors, small investors who buy now will probably be thankful for today's low nominal price after the bear market ends.