Shopify Inc. (NYSE: SHOP) is the poster child for why the pandemic was both a blessing and a curse for some companies.
Born out of necessity, a surge in demand for e-commerce technology drove the Canadian commerce platform provider’s stock as high as $1,762.90 in November 2021. Since difficult, if not impossible, quarterly comparisons rolled around, it’s been all downhill.
Market disdain for high multiple growth names hasn’t helped. In May 2022, Shopify fell as low as $308.10, a stunning 83% plunge that erased all post-Covid gains.
In late-June the stock price dove even lower, albeit due to a 10-for-1 stock split. Why would a company enact such a big split after a big decline? As we explain below, the rationale was sound—and at roughly $30 a share, Shopify is now looking as affordable as ever for long-term growth investors.
Why Did Shopify Split its Stock?
As Shopify regroups from a post-pandemic hangover, an important focus is to strengthen its corporate governance. A key step was made when the company decided to enact a 10-for-1 stock split in April 2022, a move that went into effect on June 29th.
The main purpose of the split was to insulate Shopify’s founders from potential investor activism. That’s because it coincided with a revised, court-approved governance structure that created a new class of nontransferable ‘Founder’ shares. This new class actually only contains one share that was issued to Founder and CEO Toby Lutke at a price of C$10.00.
At the same time, all of Shopify’s Class B multiple vote shares were converted to subordinate class A shares that come with inferior voting rights. Including the company’s preferred share class, this resulted in the Class A share class controlling 59% of the total voting power.
Prior to the conversion, Class B shareholders held a controlling 51% of the total voting rights. This is because a Class B share came with 10 votes compared to the single vote associated with Class A shares.
More, importantly, it means that Mr. Lutke, through his ownership of Class A, Class B, and Founder shares, now controls the other 41% of voting power. This is still a minority, so why does it matter?
It matters because the share class alphabet soup mix-up gave Shopify’s founder a far more substantial say in corporate voting matters. Having 41% of the voting power will significantly reduce the chances that a potential shareholder uprising led by an influential activist can derail the management team’s long-term growth strategy. In other words, the CEO would only need to ‘win’ 10% of the votes to gain a majority.
Along with the tough year-over-year comparisons, Shopify’s stock has been hammered by concerns about its rising cost structure. While the ramp in spending comes with an aggressive plan to expand the business into new geographies and verticals, it is also expected to come with unfavorable earnings comps in the next few quarters. This has exacerbated the downward pressure on the stock.
It is classic near-sightedness that ignores Shopify’s still bright long-term outlook.
Is Shopify Stock a Buy?
Shopify offers unique cloud-based software that lets small businesses see their web, mobile, social media, and brick-and-mortar retail channels all in one place. It is an attractive value proposition for mom and pops across many industries looking to expand their digital footprints.
Global e-commerce experienced unusual demand from 2020-2021 that isn’t likely to be repeated. Yet it is a space that will see plenty of growth in the years ahead.
As more retailers discover the benefits of setting up online storefronts (including a broader customer reach and improved profitability), the market is forecast to reach $5.55 trillion by year end. It will only grow from there as convenient web-based purchases continue to make up a larger slice of overall retail sales.
In this ‘business without borders’ Shopify is well positioned to grab market share and grow faster than the e-commerce market itself. The large customer base it amassed during the pandemic should serve as a launching pad for further expansion. According to sell-side research firms, the rollout of add-on services to existing customers and the acquisition of new customers could drive high double-digit earnings growth over the next several years.
Since the split went into effect, 10 Wall Street analysts have provided updates on Shopify. Five called the stock a buy, and five a hold. While this shows a mix of bullishness and caution, none of the group’s targets are below the current share price—and the average target of $46.71 implies 50% upside from current levels.
So, while stock splits often amount to marketing gimmicks or protectionist measures, in this case, a beaten-up long-term buy just got more affordable. There’s never been a better time to shop for Shopify.
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