There have been several high-profile stock splits over the past few years, and many have attracted quite a bit of buzz. Of course, a stock split doesn't change a company's fundamental investment thesis, and in a day and age when many low-fee online brokers offer fractional shares, the benefits of these moves for investors aren't what they used to be.
Still, those major corporations that recently opted to split their stocks attract plenty of attention. One of them is e-commerce giant Shopify (SHOP 2.34%). In my view, the attention is justified in this case -- just not because of the stock split. Instead, there are excellent reasons to buy shares of this tech giant and hold on to them for a while.
A lot can change in a year
Shopify's 10-for-1 stock split went into effect about a year ago -- on June 29, 2022. Here is how the company's shares have performed since then versus the S&P 500.
It's not even close, and while it's tempting to credit the stock split for Shopify's market-beating showing over this period, it's essential to consider other factors. First, while there was a downturn last year, the market recovered in a significant way. Many growth-oriented companies like Shopify that did not perform a stock split also performed well over the same period. Second, Shopify's revenue growth has been on an upward trend over the past 12 months.
SHOP Revenue (Quarterly YoY Growth) data by YCharts
The tech giant isn't consistently profitable, so investors pay especially close attention to how fast it is growing its top line. The higher, the better, obviously. Shopify decided to increase its prices in January, but these changes only took effect on April 23 (during the second quarter). So, for the most part, the company's improving top line growth is likely attributable to other sources, such as the recovering economy.
Third, Shopify made the painful decision to abandon its expensive logistics business in a move that should help improve the company's bottom line and margins over the long run. Shopify also resorted to cutting jobs to decrease expenses. The company's efforts to boost profitability have been well received by investors, who have rewarded it by bidding up its shares.
Attractive long-term prospects
Shopify's strong performance over the trailing 12-month period matters less than how things will unfold in months and years ahead. Can Shopify maintain this momentum? The company isn't immune to economic challenges, as we recently learned. It also remains unprofitable, which can be a turn-off for many investors, especially in a high-interest-rate environment. Shopify performed extremely well following its 2015 IPO, but that was a period of historically low interest rates.
These challenges are real, but I remain firmly in the bull camp when it comes to Shopify. Here are two reasons why. First, the need for the services Shopify provides will only grow over the long run. E-commerce is taking over. The entire retail landscape won't shift to online channels, but it is unlikely to have peaked already. Even in the U.S., e-commerce made up just 15.4% of total retail sales in the second quarter, a number that has been increasing somewhat steadily over the years.
Even assuming it will peak at 30% in the U.S., that still leaves ample room for growth. And that's before we consider the landscape in other countries, most of which have lower e-commerce penetration. Meanwhile, Shopify is one of the leaders in what it does. It allows merchants to start online storefronts from scratch, along with all the services they need, from inventory to payments, to be successful.
Second, Shopify benefits from high switching costs, an important economic moat. Building a storefront from scratch, along with a brand that manages to attract customers, is hard. Merchants won't want to risk all that hard work going to waste by switching to one of Shopify's competitors. So, expect Shopify to maintain a solid share of its market. In 2022, it held a 10% share of the U.S. e-commerce space by gross merchandise volume.
Considering how fiercely competitive this industry is, that's quite an accomplishment. The company's revenue has been northbound for a long time, and recent changes to its business should allow it to turn a profit much faster than it would have otherwise. These are much better reasons to buy Shopify's shares than the company's recent stock split.
