Shopify Inc. (NYSE: SHOP) is the poster 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 pushed the Canadian trading platform provider’s inventory to $1,762.90 in November 2021. Since difficult, if not impossible, quarterly comparisons have been rolling around, it has all gone downhill.
The market’s disdain for high multiple growth names has not helped. In May 2022, Shopify fell as low as $308.10, a staggering 83% plunge that wiped out all post-Covid gains.
At the end of June, the stock price plunged even lower, albeit by a 10-for-1 stock split. Why would a company make such a big split after a big drop? As we explain below, the rationale was good — and at around $30 a share, Shopify now looks as affordable as ever for long-term growth investors.
Why did Shopify split its inventory?
As Shopify recovers from a post-pandemic hangover, a key focus is strengthening corporate governance. An important step was taken when the company decided to implement a 10 for 1 stock split in April 2022, a move that took effect on June 29.e.
The main purpose of the split was to isolate 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 non-transferable “Founder” stock. This new class actually contains only one share issued to founder and CEO Toby Lutke at a price of C$10.00.
At the same time, all Shopify Class B shares with multiple voting rights were converted to subordinate Class A shares with inferior voting rights. Including the company’s preferred share class, this resulted in the class A share class holding 59% of the total voting power.
Prior to the conversion, Class B shareholders held a majority stake of 51% of the total voting rights. This is because a Class B share received 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 the voting rights. This is still a minority, so who cares?
It’s important because the stock-class alphabet mix-up gave Shopify’s founder a much more substantial voice in corporate voting matters. Having 41% of the vote will significantly reduce the chance that a potential shareholder revolt led by an influential activist could derail the management team’s long-term growth strategy. In other words, the CEO would only need to “win” 10% of the vote to gain a majority.
In addition to the tough year-over-year comparisons, Shopify’s inventory was plagued by concerns about its rising cost structure. While the increase in spending is accompanied by an aggressive plan to expand the business into new geographies and vertical markets, it is also expected to be accompanied by unfavorable earnings conversions in the coming years. coming quarters. This has exacerbated the downward pressure on the stock.
It’s classic myopia that ignores Shopify’s still clear long-term vision.
Is Shopify Stock a Buy?
Shopify offers a unique cloud-based software that allows small businesses to see their web, mobile, social media, and brick-and-mortar shopping channels all in one place. It’s an attractive value proposition for moms and is prevalent in many industries looking to expand their digital footprint.
global e-commerce experienced unusual demand from 2020-2021 that is unlikely to be repeated. Nevertheless, it is a space that will grow rapidly in the coming years.
As more retailers discover the benefits of establishing online storefronts (including wider customer reach and improved profitability), the market is expected to reach $5.55 trillion by the end of the year. It will only grow from there as easy online purchases continue to make up a larger share of total retail sales.
In this borderless business, Shopify is well positioned to capture market share and grow faster than the ecommerce market itself. The large customer base it has amassed during the pandemic should serve as a launch pad for further expansion. research firms, the roll-out of additional services to existing customers and the acquisition of new customers could lead to high double-digit profit growth in the coming years.
Since the split took effect, 10 Wall Street analysts have provided updates on Shopify. Five called the stock a buy, and five a hold. While this is a mix of bullishness and cautionnone of the group’s targets are below the current stock price – and the average target of $46.71 implies a 50% increase from current levels.
So while stock splits often come down to marketing gimmicks or protectionist measures, in this case, a beat-up long-term buy became more affordable. There’s never been a better time to shop for Shopify.