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What the Shopify stock split means for investors

|July 08, 2022
What the Shopify stock split means for investors

To split or not to split? That’s the choice that faces many companies with a share price that has had significant growth. Do you keep the shares whole so the market can clearly see the value built, or split each share into multiple units to create a more affordable entry point for new investors?

A famous non-splitter is Berkshire Hathaway. Known for its CEO, Warren Buffet, Berkshire Hathaway has never split its Class A shares and trades at around $400,000 per share. On the other hand, Apple has split five times since their listing such that if they went public with the share count they have now, the IPO price would have been 10 cents rather than $22.

Canadian tech giant Shopify Inc (TSX: SHOP) joined the split camp on June 29th when it divided its shares on a 10-to-1 basis. This was executed after a difficult first half of the year for tech as the pandemic boom wanes and investors turn soft on e-commerce stocks. For Shopify, the impact has been a 76 percent drop in share price for the year. Also, around the same time as the split, Shopify put a motion in front of shareholders to grant CEO Tobi Lütke a “founding share” that would give him 40 percent of the voting power over the company. While shareholders approved this, proxy advisor Glass Lewis, which works with institutional investors, had recommended a negative vote.

Strategically, what would be the benefit of a share split under these conditions?

A few reasons:

  1. Create a share price that is more attractive to individual (“retail”) investors. The overall company value does not change, but there is more appeal for investors to own 10 shares at $40 each compared to just one $400 share. This will add more participants to Shopify’s shareholder base.

  2. Improve liquidity—that is, increase the number of shares being traded. Increased liquidity means that the shares will be easier to trade and create an environment where the share price can closely track good (and bad) news.

  3. Improve the share price. The psychological effect of a more attractive share price tends to lift the price of a stock. A study by Bank of America found that stocks on the S&P 500 index that split gained 25 percent on average over the 12 months following. The index, over the same period, gained 9 percent.

Did it work for Shopify?

Initially, it’s hard to say. Shopify’s share price on the TSX has fallen by just over four percent in the week since the split. However, it may be too soon to slow the momentum of a price decline of 76 percent over the year prior. The average volume of shares traded daily has been 2.3 million since the split, compared to 3.4 million from the beginning of June to when the split took place—no apparent benefit.

Where there has been a change is in the number of trades. Since the split, an average of 22,740 trades have been made daily, compared to 7,446 from the beginning of June to the split. This could indicate more participants in Shopify’s shares.

Like all stocks, the financial fundamentals determine the ultimate value and share price. However, like Apple, a component of an investment decision in Shopify is the “story” behind the stock. Apple is known as a leading technology innovator and has built lasting consumer loyalty. Shopify has developed a reputation as a disruptor in e-commerce and the “anti-Amazon” that empowers small businesses. This type of sentiment has been behind the Reddit rallies we’ve seen recently with some stocks. As retail investors tend to respond to a story more than institutional investors, it does make sense to provide them with a more attractive entry point.

Time will tell whether the split was successful for Shopify, but it is beginning to show some impact. As the split normalizes, it will be incumbent on Shopify to continue to engage with the markets, maintain solid fundamentals and turn supporters into investors.

Interested in learning how to navigate change, leverage opportunities, and enhance value? NATIONAL’s Capital Markets team has provided strategic counsel to its clients for over 20 years. Contact our team of experts.

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