Shopify announces a 10-to-1 share split with an unusual provision

There is no doubt about that Shopify ( STORE 2.35% ) has democratized the world of digital retail. By providing everything entrepreneurs need to sell their goods online, the company has exposed a large and profitable niche to itself and enriched investors in the process.

Shopify’s outstanding business performance opened the door to a rising stock price. Shares rose about 200% over the past three years and almost 800% over the previous five years. Since Shopify’s listing in May 2015, the share has also risen by 2,280% (at the time of writing). It is worth noting that the stock has achieved these gains even in the light of a recent divestment where the shares have been pulled down in connection with the recent correction and the technology-centered bear market.

To start the week, Shopify announced the first share split in the company’s history – which includes an unorthodox provision to help retain CEO Tobi Lütke’s control of the company he founded.

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The details of the division

In a regulatory application that fell on Monday, the company said its board of directors had approved a 10-for-1 share split. Shopify plans to seek shareholder approval for the measure, which will result from changes to the company’s articles of association, as part of a comprehensive review of the company’s management structure. The voting will take place at the company’s upcoming annual and extraordinary general meeting, which will be held on June 7, 2022.

In an unusual move, Shopify will introduce a new share class, called the Founder share, which will give Lütke a variable number of votes. This new share class, when combined with the Class B shares owned by Lütke and his immediate family, will account for 40% of the total voting power of Shopify shares and maintain it at that level forever. It is important to note that the CEO currently has a 6.5% stake in the company. The proposed share structure will protect Shopify from unsolicited takeover bids.

Lütke would be forced to relinquish the shares in the event that he was no longer a Shopify director, board member or consultant. He would also have a ban on transferring the Founder Share to any other party, including family members.

In order for the proposal to be adopted, it must be approved by at least a two-thirds majority of Class A and Class B shareholders (excluding Lütke). Provided that Shopify investors approve the measure, the registered shareholders will per. June 22, 2022 receive nine additional shares for each share they own after the market closes on June 28.

Shopify investors will not be required to take any further action to participate in the share split. The normal process involves brokerage firms handling the details behind the scenes, with the additional shares simply popping up in investor accounts.

It is worth noting that the newly issued shares may not be displayed immediately on June 28th. The schedule varies slightly from brokerage firm to brokerage house, and as such, it can sometimes take several days before the new shares show up.

Let’s add some numbers to the equation to provide a much needed context. For each share in Shopify Equity Investors, which is currently trading at around $ 600 per share. share, the shareholders will after division own 10 shares worth $ 60 each.

Does the share split mean that Shopify is a purchase?

As the example above illustrates, the total value of the shares held by investors will not change in value as a result of the share split. One share of Shopify shares at a price of $ 600 is worth the same as 10 shares worth $ 60 (10 x $ 60 = $ 600). To use the pizza analogy, no matter how many slices you cut a pizza in, you still have the same amount of pie to eat. Similarly, Shopify shareholders will simply have a greater number of lower prices.

As a result, a pending share split alone is no reason to buy shares. Rather, it is the strength of the underlying business and the potential for future stock price gains that should be the most important consideration when deciding whether to invest in a business or not – and there are plenty of reasons to be optimistic about Shopify.

Revenue grew by 57% year over year in 2021, a remarkable achievement given that its top line increased by 86% in 2020, driven by pandemic-related tailwinds. It is also a telling sign that gross profit grew 61%, exceeding revenue growth as the company was able to leverage its growing scale to fall more to the bottom line. To that end, adjusted net income increased by 66%.

Shopify shares have taken it on the chin recently, with the stock falling 64% from highs reached last year. The decline was driven by the recent correction in tech stocks and fears of declining growth in e-commerce. But even after record adoption last year, global e-commerce sales are expected to grow by 13% to $ 5.5 trillion in 2022 and rise to $ 7.4 trillion in 2025.

This represents a major and growing opportunity for Shopify, and that, combined with its industry-leading position, is a compelling argument for owning shares.

This article represents the opinion of the author, who may disagree with the “official” recommendation position for a Motley Fool premium advisory service. We are motley! Questioning an investment dissertation – even one of our own – helps us all think critically about investing and make decisions that help us become wiser, happier and richer.

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