Don’t be fooled by Shopify’s (NYSE:SHOP) 10-for-1 stock split. The Shopify stock split is largely cosmetic and does nothing to fix the problems afflicting the e-commerce company.
The proposed 10-for-1 split will see Shopify shareholders receive nine additional Class A shares or Class B shares for every one they hold at the close of business on June 28. Shopify claims the purpose of the stock split is to make share ownership “more accessible” to investors. While a stock split can make shares more affordable and appealing to retail investors by lowering the price, it doesn’t change the underlying fundamentals at a company or boost a stock’s intrinsic value.
Often splits are done to boost a stagnant or falling stock. Shopify follows several other richly valued tech stocks in announcing splits in recent months, including Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Tesla (NASDAQ:TSLA). However, investors shouldn’t be fooled into thinking that a stock split resolves the issues plaguing Shopify that are pushing SHOP stock lower. If anything, the Shopify stock split announcement is just the latest attempt by Shopify to distract from its problems.
Last week, Shopify announced it will facilitate digital payments across the Bitcoin Lightning Network. News of the move into cryptocurrencies caused some initial excitement among investors. But the move doesn’t reverse Shopify’s sinking sales and slowing growth.
SHOP stock plunged more than 15% after its most recent earnings were made public in mid-February. The company guided that its revenue growth this year would be slower than the 57% achieved in 2021. The cause? The removal of government stimulus measures and concerns that consumer spending is slowing with inflation running at a 40-year high. SHOP stock is now down 55% year-to-date, and 65% from it’s all-time high reached last November.
While Shopify currently has an estimated 1.75 million merchants worldwide who use its services to run their websites and facilitate online sales, those user numbers have been declining and Shopify faces increased competition from competitors ranging from Amazon and Google to Wix (NASDAQ:WIX) and Squarespace (NYSE:SQSP).
Investors should also be aware the Shopify stock split, which still has to be approved by shareholders, will also change the company’s governance structure to give more power to founder and chief executive officer (CEO) Tobi Lutke. The stock split will create a new class of stock called a “founder share” that will give Lutke a total voting power of 40% when combined with his existing Class B shares. Current shareholders of Shopify will need to have a lot of faith in Lutke and his managerial abilities to approve giving him more control over the struggling company.
While the stock split announcement makes for a nice headline, it does nothing to right the ship at Shopify. Moreover, the Shopify stock split looks like a thinly veiled power grab on the part of the CEO. Given the problems that Shopify is grappling with right now, and its depreciating share price, investors should stay far away from SHOP stock for the time being.
On the date of publication, Joel Baglole held a long position in GOOGL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
