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If the stock can split, you must commit.
On Monday, e-commerce giant Shopify became the latest tech company to propose a stock split, an increasingly favored tool for stimulating retail interest by making stock ownership seem cheaper. Retail traders, start your engines.
Split’s Always Sunny in Ottawa
Technically, a stock split doesn’t do anything except increase share count. A company’s board proportionately issues more stock without diluting current shareholders’ stakes, thereby increasing the number of outstanding shares. This inversely lowers individual share value, but nothing happens to the market value of the company — it doesn’t change revenue forecasts or any core financials. However, in defiance of logic, it routinely excites traders anyway, especially retail investors who can buy a seemingly cheaper (in reality, smaller) piece of the pie.
Alphabet, for example, announced in February that it will do a 20-for-1 stock split on July 15. That means it will give current shareholders 19 additional shares for every one they own, thus dividing the company’s share price by 20. Right now, one Google share is worth $2,665, which implies a price of about $133 if the split happened today. Ottawa-based Shopify, which climbed to more than $1,600 a share last year, is among the worst hit by this year’s tech rout. At $603, the company is down 55% in 2022. Shopify’s proposed 10-for-1 split aims to get some of its mojo back by capitalizing on investor excitement:
- S&P 500 companies that announced splits since 1980 have, on average, performed 16% better than the index in the following 12 months, according to Bank of America Securities.
- In addition to Alphabet, Tesla and Amazon have announced stock split plans this year. Tesla shares rose 8% the day it announced its split, Alphabet jumped by 7.5%, and Amazon went up by 5.4%.
Complicated Accounting: Shopify, which went public in 2015, is known for an especially weird share structure. CEO and founder Tobi Lütke and other key personnel own Class B shares with 10 times the voting power of Class A shares. If their Class B supershares ever fall below 5% of outstanding shares, they automatically become Class A shares, essentially stripping away management’s control. In addition to the stock split, Shopify is proposing to give Lütke a special “founder share” that will increase his voting shares to 40% — and which he can keep as long as he remains with the company.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.