Shopify Stock Split 2022: Is 10:1 Split Really Required?
Shopify Stock Split 2022: The year 2022 has been one of the forgetful years for Shopify. The stock (NYSE: SHOP) is down by about 73% since the start of the year. It has fallen from a level of $1363.14 on 3rd January to $372 (as of 7th June 11:38 am GMT). While the reasons are abounding for the share fall, dismal performance in the quarterly financial results stands out. Add to it, the bearish global sentiments amid rising interest rates and increasing inflation fear.
While Shopify had a fantastic growth over the last couple of years, the deceleration in the growth of revenue and profit is understandable. In the first quarter, Shopify reported revenue that grew at 22% in comparison to 110% growth in the same quarter a year before. Many investors believe that the growth story for e-commerce is over and hence they have decided to dump the stock sending the stock down by about 73% since the start of 2022.
In the midst of this downfall, the company’s management decided for 10:1 stock split which needs to be approved in the shareholders’ annual general meeting scheduled on 7th June 2022. We will discuss the need for this stock split in this article, its probable impact on the share price and whether stock split make Shopify stock a buy?
Shopify Stock Split 2022: Facts about Shopify Stock Split
- On 22nd April 2022, Shopify announced its intention to go for a stock split in the ratio of 10:1, and the stock will trade split adjusted from 28th June 2022.
- Along with the announcement of stock split, there was another proposal that it wants to give company’s founder and CEO Tobi Lutke a special “founder share” to give him voting rights as long as he remains in the company. It is also proposed that CEO Tobi Lutke and his affiliates would hold 40% of the votes at the company even if that does not match with the equity stakes held by CEO.
- The founder share will sunset in two conditions, a) – Lutke no longer serves as executive officer, board member or consultant and b)- he or his family or his affiliates does not hold equity shares in the combination of Class A and Class B equivalent to 30 percent of Class B shares they currently hold.
- At the event, Shopify management said that they see Shopify stock split 2022 as an opportunity to make their company voting rights more affordable to larger segment of the population and also diversify its ownership base. But in reality, it seems this is not the case with this split. This will place a good quantum of voting rights in the hands of directors and founder and is seen as a move to protect the company against shareholders’ activism.
- Advisory company Institutional Shareholder Services (ISS) opposed the move saying that one shares one vote principle is best for shareholders and this kind of proposal will unduly give voting rights to the minority shareholders which will be used to protect their interests in the company.
- Similar is the commentary from another advisory firm Glass Lewis. It said that it limits the rights of small investors. At present, Shopify had 114.2 million class A subordinate voting shares and approximately 12 million class B shares. Lutke owned a majority of class B shares – roughly 7.9 million giving him about 33.8 of voting rights. Another director John Philips and his wife Catherine holds 3.75 million of class B shares giving them 16% of Shopify voting rights. So, in totality, roughly 50% of the voting rights are held by two directors, and with the recent proposal of founder shares, it is intended to continue this proposition, even if Lutke does not hold the position of CEO or his equity shares decline with the course of time.
- The good thing is that proposals of founder shares and stock split will be put separately and even if the proposal of founder share does not go through in the wake of opposition by the shareholders’ advisory firms, the Shopify stock split 2022 can still make its way. To pass the proposal of a stock split, it should get the support of 2/3rd of shareholders and a majority of votes cast excluding Lutke and his affiliates.
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Shopify Stock Split 2022: Latest Video
Shopify Stock Split 2022: Stock split impact on share price
While the impact is highly uncertain but as generally seen, the approval of the stock split has provided a short-term bullish push. On Tuesday, at the shareholders’ annual general meet, both proposals of “founder share” and a 10:1 Shopify stock split 2022 are approved and the share price is seen reacting to the news positively as it went up by 5.69% to close at $380.74. Investors seem to have taken the approval of both proposals in a positive way.
However, this may be a knee-jerk reaction and this rally may be a result of shorts being covered in the stock. It needs to be kept in mind that Shopify stock has gone nearly 70% down since the beginning of 2022 and bears do keep a lot of short positions in Shopify. Upon approval of the proposals in the shareholders’ meet, it is anticipated that stock may go high in the near term future and so bears go cover their shorts in such downtrend stocks. The real picture will be clear in a week’s time, if the stock can sustain this rally and fresh buying is initiated in the stock, then it presents clear signals.
Yesterday’s (7.06.2022) in the stock is not surprising at all, but it needs to be kept in mind that a stock split does not create value for the company and in the long term, it is only the fundamentals that drive the share price up or down.
Shopify Stock Split 2022: Whether a stock split makes Shopify a buy?
It appears that a 10:1 stock split was not necessary at this juncture. Shopify announced the stock split in the month of April, and the stock was already somewhere around $400 the 10:1 stock split will take it down to around $40, which is too low a share price for a company like Shopify.
It seems that a stock split has been initiated to facilitate the passing of the proposal of “founder share” as in the absence of a large number of outstanding shares, it would have been difficult to broaden the base of voting rights after a concentration of 40% of the voting rights to CEO.
But, the Shopify stock split 2022 in itself does not make Shopify stock a buy. Remember, the company has strong fundamentals and is expanding its base by buying shipping companies like Delivery for $2.1 billion. Also, Shopify acquired a stake in Global- E- Online in 2021. The revenue and profit growth are moderate and are returning back to the historic mean.
If the investor believes in the management, Shopify is a killer buy after being 70% down in the recent months, but the Shopify stock split 2022 has infringed voting rights for small investors to some extent and it does not attach more value to Shopify’s existing business.
Vineet Agarwal
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