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Apr 22, 2022

Shopify's stock split fails to rekindle investor romance

Shopify reportedly in talks to buy tech startup Deliverr

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Shopify Inc. set out to win the affection of retail investors with a 10-for-1 stock split. The gambit appears to be too little, too late.

A pop on the day of the April 11 announcement has given way to a relentless selloff. Shopify is down 23 per cent since then to about $605, far underperforming Canada’s benchmark index, the Nasdaq 100 Index and many other software stocks. So much for signaling to the market that the e-commerce company was becoming more shareholder friendly.

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Timing may be to blame. After surging during the early months of the pandemic to become Canada’s most valuable company, Shopify had already tumbled 56 per cent this year before the split. Investors are looking closer at its slowing growth rate, its modest level of profitability and rising interest rates, which tend to put pressure high-multiple stocks. It’s now on the brink of falling off the list of the S&P/TSX Composite Index’s 10 most valuable companies.

Shopify needed a way to boost the shares and stock splits have worked for other companies, said David Trainer, chief executive officer at research firm New Constructs LLC. “Non-fundamental tricks like stock splits tend to boost prices more when stock price momentum is positive,” he said.

Now the next catalyst for the stock may not come until Shopify reports earnings on May 5, when investors will be looking for insight into the growth outlook as the company battles more competition and the return of shoppers to physical stores. 

To be sure, retail traders almost doubled their daily average purchases of the stock to US$8.3 million in the two sessions after the split announcement. But the net inflow was still negligible compared to stocks like Apple Inc. and Amazon.com Inc., which saw more than US$170 million and US$33 million of purchases each after their announcements, according to Vanda Research data.

There’s another problem, too. In announcing the stock split, Shopify also announced that it wants to give Chief Executive Officer Tobi Lutke a special “founder share” that will preserve his voting power as long as he’s at the company. He and his affiliates could retain 40 per cent of the votes at the company even if their equity stake declines.

The new structure, which is subject to approval from shareholders, would shield Lutke and Shopify from shareholder activism. 

“This could mean that the company will remain independent, and not be forced into a sale,” said Ben Silverman, director of research at VerityData. 

The underlying concerns surrounding its fundamentals haven’t waned. Competition is increasing with Amazon.com Inc. saying Thursday it will launch a new “Buy With Prime” feature that could blunt Shopify’s momentum. In its last earnings report, Ottawa-based Shopify warned that sales growth will be lower in the first quarter of this year than in same quarter of 2021.

Tech chart of the day:

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Netflix Inc.’s price-to-earnings ratio soared to more than 280 in 2015, when the streaming giant was attracting millions of subscribers with its binge-worthy original content and quickly expanding into new geographies. Now with the market saturated and clogged with competition, the valuation has slid 93 per cent to 18.7 times profit, in line with the S&P 500.

Top tech stories:

  • The world’s biggest technology companies could face billions of dollars in fines for breaches of new European Union legislation, details of which are expected to be agreed upon by lawmakers as soon as Friday.
  • Snap Inc. reported user growth that beat analysts’ estimates, sending shares up in after-market trading
  • Elon Musk has said his US$54.20 per share offer for Twitter Inc. was his “best and final.” While that may prove true, he just signaled that he might go higher by putting together a financing package that gives him room to increase the offer.
  • SAP SE reported a further acceleration in its newer cloud business that exceeded expectations, providing a boon to the company amid its turnaround plan
  • SoftBank Group Corp. expects to retain a controlling stake in Arm Ltd. after the planned initial public offering of the chip business, selling a smaller portion than originally expected, according to people familiar with the matter
  • Applied Materials Inc., Netflix Inc., Intuitive Surgical Inc., and Nvidia Corp., are the biggest winners of one-time, multimillion-dollar California grants intended to spur job creation and investment
  • Bain Capital is considering a deal for European technology-services provider Solutions 30 SE, according to people familiar with the matter