Shopify Stock Split: The Real Reason It Matters

Ddespite some spectacular sales in recent months, Shopify Stock (NYSE: SHOP) has jumped more than 800% in the last five years. Due to this incredible performance, the company’s shares are currently worth more than $600 each, an expensive figure that is likely keeping some retail investors away.

In an appeal to everyday investors, Shopify recently announced plans to make a 10-to-1 stock split. The move could result in substantial share price gains, just as it has done for leading companies like You’re here, Alphabetand Amazonwho also recently unveiled plans for upcoming stock splits.

STORE given by Y-Charts

However, Shopify’s split proposal also includes another major provision — one that could present an even bigger reason for investors to take a buy-and-hold approach to stocks.

More power for Shopify’s CEO

Shareholders will vote on the 10-to-1 stock split at a June 7 meeting, but that share structure will also include a proposal to create a new class of shares. If approved, the new arrangement will see the creation of a founder’s share held by Shopify founder and CEO Tobi Lütke. This would ensure that Lütke, along with his immediate family and affiliates, would control 40% of Shopify’s voting rights.

A small business owner manages online orders from his tablet.

Image source: Getty Images.

Why shareholders should applaud the move

The incredible returns Shopify has generated over the past half-decade have largely been made possible by Lütke’s management decisions and sound guidance. If the proposed stock split is completed and the Founder’s Share is issued, Lütke will be in a much better position to realize his long-term vision for the company.

With stocks down around 66% from their peak, Shopify may be exposed to an increased risk of hostile acquisitions. The company’s market capitalization of around $77.5 billion would keep all big buyers out. But tech giants, including Amazon, Alphabet and Microsofthave the resources to buy Shopify even if it would require paying a significant premium over current prices.

A CEO controlling such a large stake in a company’s voting rights might seem a little ominous at first glance, but high levels of insider ownership and executive control often end up being a good thing for shareholders. With an ownership position of approximately 6.5% of the company’s stock, a substantial portion of Lütke’s wealth is contained in Shopify stock.

Lütke has a 100-year growth vision for Shopify, and his elevated ownership position in the e-commerce company must ensure that it takes actions that benefit shareholders as a whole. There is also a conditional provision built into the proposal ensuring that he will remain heavily invested in the business and retain a leadership role. Check out this section of the recent stock restructuring proposal:

The Founder’s Action will terminate if Mr. Lütke no longer serves the Company in some capacity (as an executive officer, board member, or consultant whose primary engagement is with the Company) or if Mr. Lütke , his immediate family and affiliates no longer hold multiple Class A and Class B shares equal to at least 30% of the Class B shares currently held by Mr. Lütke and his affiliates.

This stipulation ensures that Lütke will need to remain significantly invested in Shopify in order to retain the outsized voting power afforded by his Founder’s Share. As such, investors can be assured that he would use this power to pursue initiatives that would increase the value of his shares — and those of other shareholders.

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keith noonan has no position in the stocks mentioned. The Motley Fool owns and recommends Shopify. The Motley Fool recommends the following options: $1140 January 2023 Long Calls on Shopify and $1160 January 2023 Short Calls on Shopify. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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