Shopify Stock Split: 1 Reason to Be Skeptical
Shopify (NYSE: SHOP) is joining the stock split club.
Just months after Amazon and Alphabet declared their own stock splits, Shopify has decided to follow suit, saying Monday morning that it will divide its stock in 10 ways. In other words, if you owned one share worth $617 today, after the stock split you'd have 10 shares worth $61.70 each. Your holdings have the same value before and after.
Shopify got a modest bump on the news, with shares finishing up 2% on Monday, but it wasn't as big of a surge as Amazon and Alphabet experienced after they declared their stock splits, nor did it jump as much as Tesla and Apple did when they split their stocks in 2020.
Shopify's split comes with a twist. Founder and CEO Tobi Lütke will get a "Founder share" that gives Lütke a variable number votes that when combined with his Class B supervoting shares will give him 40% of total voting power. The Founder share will dissolve if Lütke is no longer involved with the company or if his and his family's Class B ownership falls below 30%. As part of the arrangement, one of Shopify's directors will transfer his shares from Class B to Class A. Had that director done so now, Lütke would currently have 40% voting share, meaning his voting rights aren't changing significantly. Like the stock split, the proposal will come before a vote at the June shareholder meeting.
Image source: Getty Images.
What's unusual
Though the Founder share announcement is an odd arrangement, it's not unusual for a founder to retain a significant voting stake. Shopify's board argued, "Tobi is key to supporting and executing Shopify's strategic vision and this proposal ensures his interests are aligned with long-term shareholder value creation."
What's more suspicious about the stock split announcement is the timing. Usually, companies split their stock after a bull run: The share price has passed some kind of milestone, and management decides it's time to reset the share price, making it easier for retail investors to buy the stock and trade options on it.
That wasn't the case with Shopify. The company announced its stock split after the stock had fallen 66% from its peak in November. In the press release explaining its plans, Shopify said that the split will make "share ownership more accessible to all investors." But the stock has traded above its current share price for almost all of the past two years, so the timing seems suspect.
Another possible explanation is that Amazon's own stock split motivated Shopify's decision. Amazon is its biggest rival, and shares of the e-commerce giant jumped more than 5% when it announced its own 10-for-1 stock split a month ago.
There's no hard-and-fast rule for when a company should split a stock, and at $600 a share, Shopify's share price is higher than the vast majority of stocks on the market. Other stocks, like Nike or Starbucks, have a history of offering 2-for-1 splits when the stock climbs past $100 a share. RH, the company formerly as Restoration Hardware, recently announced a 3-for-1 stock split with its share price trading around $350.
What it means for investors
Ultimately, the stock split shouldn't affect Shopify's performance or any investor's decision to own the stock. The benefit of making the shares more affordable to individual investors is minimal since many brokerage accounts offer fractional trading, and the stock split itself doesn't create any additional value for shareholders.
Still, when companies split their stock, it's worth understanding why. In Shopify's case, the company seems eager to capture some of the magic that lifted fellow tech titans after they announced stock splits. So far, shareholders don't seem as convinced by Shopfiy's split, though that could change.
In the long run, neither the stock split nor Shopify's individual share price should have a material effect on the stock's performance.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jeremy Bowman owns Amazon, Nike, RH, Shopify, and Starbucks. The Motley Fool owns and recommends Alphabet (A shares), Amazon, Apple, Nike, RH, Shopify, Starbucks, and Tesla. The Motley Fool recommends Alphabet (C shares) and recommends the following options: long January 2023 $1,140 calls on Shopify, long March 2023 $120 calls on Apple, short April 2022 $100 calls on Starbucks, short January 2023 $1,160 calls on Shopify, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
