Stock splits are back in vogue. In recent months, companies ranging from Google parent Alphabet, Amazon.com and Tesla have all announced such plans.
With shares in these tech giants trading near recent highs, stock splits are seen as one way of making shares more affordable for smaller investors. Never mind that investors who cannot afford the stock’s high price can always buy cheaper fractional shares instead.
Shopify, the Canadian ecommerce platform, faces no such dilemmas. The company, which helps merchants and brands create an online storefront, has seen its New York-listed shares drop 55 per cent in value over the past five months.
That makes plans for a 10-for-1 stock split look very odd indeed. So does the company’s proposal to issue chief executive Tobi Lütke with a new class of shares that will preserve his voting power as long as he remains at the company.
Companies that have announced share splits have seen their shares go up, even though the practice does not alter the value or the fundamentals of a company. One reason for this may be that a cosmetically lower share price facilitates options trading, which has grown in popularity among smaller traders.
Shopify was one of the biggest winners from the pandemic. Its business bloomed as lockdowns pushed millions of small businesses to open online stores and unemployed Americans to start side hustles.
That growth is set to slow as shoppers return to brick-and-mortar shopping. Plans by the company to invest in warehouse hubs and expand its delivery network to compete against Amazon have spooked investors. Higher capital expenditure is expected to weigh on cash flows and margins this year and next.
Shopify’s weak share price makes it vulnerable to unwanted takeover approaches. That may explain the “Founder Share” proposal. This, combined with shares already owned by Lutke and affiliates, would preserve his voting power at 40 per cent of outstanding shares. Investors should take their custom elsewhere.
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