Shopify follows FAANG with its own stock division. Time to buy?
Amid continued sell-off in tech stocks, e-commerce leader Shopify ( STORE -4.37% ) made headlines last week as the latest tech giant to announce a stock split. Apple and You’re here the two completed stock splits in 2020, while the semiconductor giant Nvidia achieved its own split last year. Even more recently, the giants FAANG Alphabet and Amazon both have announced stock splits, which are expected to take place this summer.
Under the terms of the 10-to-1 stock split offered by Shopify, investors would receive nine additional Class A or B shares for each share they own. However, Shopify CEO and founder Tobi Lütke would receive a special “founder’s share,” effectively giving him 40% total voting power when combined with his existing Class B shares. Shareholders must vote on the stock split on June 7.
If shareholders vote in favor of the proposal, investors could benefit from a short-term boost leading up to the split. However, it may be in investors’ best interests to hold onto short-term volatility throughout to maximize gains. Let’s review what a stock split means and examine what splits have historically done for investors.
Advantages of a stock split
In a stock split, companies increase the number of shares outstanding, which subsequently decreases the stock price by a proportional multiple. This is because the company’s market capitalization is designed to stay the same. However, recent examples show that stock splits often result in a increase in the valuation of the company because the shares appear cheaper than they actually are, fueling investor demand.
Over the past two years, investors have witnessed abnormally high prices across all asset classes due to a number of factors. Things like meme stocks, popular demand in trading apps like Robin Hood, and growing cryptocurrency adoption have all contributed to inflated valuation multiples. As a result, stock prices have risen sharply, which may worry some investors.
If a stock has surged dramatically, especially relative to similar companies, it’s not uncommon for investors to start wondering when the music will stop. In order to prevent sell-offs and to market the shares to a wider range of investors, company executives may choose to split the shares. This is because the actions will be watch cheaper, so less sophisticated investors often start accumulating stocks in large volumes. Subsequently, the trading liquidity of the stock increases.
Buy now or buy later?
Recent stock splits from other major tech companies offer insight into the impact of a future split on Shopify investors. Apple, for example, completed its last split in August 2020. After the split, Apple stock closed at around $129 per share. But about a month later, Apple stock decreases by 10%. If investors had held Apple stock for the past 18 months, they would have enjoyed an overall return of 27%, as the current price of Apple stock is around $164 per share.
Tesla also completed a stock split in 2020, on the same day as Apple. Immediately after the split, Tesla stock closed around $498 per share on a split-adjusted basis. But Tesla stock experienced the same phenomenon as Apple: following the split, Tesla stock fell 14% and closed around $429 per share. If investors held Tesla shares through this short-term volatility and dynamic trading, they would have earned a 99% return, as Tesla now trades at around $989 per share.
The common denominator is that the stock price has generally increased long-term and has shown resilience despite aggressive short-term traders buying and selling stocks at the time of the split.
Keep an eye on the valuation
Between January 2020 and December 2021, Shopify’s inventory grew by 244%. But despite this performance, the company has not been immune to the sell-off in tech stocks, which has hit growth companies particularly hard. Year-to-date, Shopify’s stock is down nearly 60% at the time of this writing. This translates to a current price-to-sell ratio of 16, down from 53 in June 2021. significant in the long term after the action. – split events. Now may be a good time to buy Shopify shares, as they are hovering around 52-week lows and before they possibly rise if the split is approved.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.