Despite some dramatic sell-offs in recent months, Shopify stock (NYSE: SHOP) has surged more than 800% over the last five years. Due to that incredible performance, the company's shares currently go for more than $600 apiece -- a pricey figure that's probably keeping some retail investors on the sidelines.
In an appeal to everyday investors, Shopify recently announced that it plans to carry out a 10-for-1 stock split. The move could result in substantial share-price gains, just as it has for high-profile companies like Tesla, Alphabet, and Amazon, all of which have also recently unveiled plans for upcoming stock splits.
However, Shopify's split proposal also includes another major provision -- one that could present an even more significant reason for investors to take a buy-and-hold approach to the stock.
More power for Shopify CEO
Shareholders will vote on the 10-for-1 stock split at a June 7 meeting, but that share structure will also include a proposal for the creation of a new class of shares. If approved, the new arrangement will see the creation of a Founder share held by Shopify founder and CEO Tobi Lütke. This would ensure that Lütke, together with his immediate family and affiliates, would control 40% of Shopify's voting power.
Image Source: Getty Images.
Why shareholders should cheer the move
The incredible returns that Shopify has delivered over the last half-decade have largely been made possible by Lütke's deft management decisions and guidance. If the proposed stock split is carried out and the Founder share is issued, Lütke will be in a much better position to carry out his long-term vision for the business.
With stock trading down roughly 66% from its peak, Shopify may be at increased risk of hostile acquisitions. The company's market capitalization of about $77.5 billion would preclude all but large buyers from making a play. But tech giants, including Amazon, Alphabet, and Microsoft, have the necessary resources to purchase Shopify even if doing so would require paying a significant premium from current prices.
A CEO controlling such a large stake in a company's voting power might seem a bit worrying at first glance, but high levels of insider ownership and executive control often wind up being a good thing for shareholders. With an ownership position of roughly 6.5% of the company's shares, a substantial portion of Lütke's wealth is wrapped up in Shopify stock.
Lütke has a 100-year growth vision for Shopify, and his high ownership position in the e-commerce company should ensure that he makes moves that benefit shareholders at large. There's also a conditional provision built into the proposal ensuring that he will remain heavily invested in the company and stay on in a leadership role. Check out this section from the recent share restructuring proposal:
The Founder share will sunset if Mr. Lütke no longer serves the Company in certain capacities (as an executive officer, board member, or consultant whose primary engagement is with the Company) or Mr. Lütke, his immediate family, and his affiliates no longer hold several Class A and Class B shares equal to at least 30% of the Class B shares currently held by Mr. Lütke and his affiliates.
This stipulation ensures that Lütke will have to remain significantly invested in Shopify in order to retain the outsized voting power granted by his Founder share. As such, investors can rest assured that he would use that power to pursue initiatives likely to increase the value of his shares -- and those of other shareholders.
Find out why Shopify is one of the 10 best stocks to buy now
Our award-winning analyst team has spent more than a decade beating the market. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed their ten top stock picks for investors to buy right now. Shopify is on the list -- but there are nine others you may be overlooking.
Click here to get access to the full list!
*Stock Advisor returns as of April 7, 2022
Keith Noonan has no position in any of the stocks mentioned. The Motley Fool owns and recommends Shopify. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
