Shopify: stock split gadget didn’t work (NYSE:SHOP)

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Shopify (NYSE: SHOP) shareholders found out the hard way this week that stock splits aren’t much more than financial gimmicks. After several large-cap tech companies managed to split their shares over the past year, the e-commerce platform executed a large stock split and the stock continued to hit recent lows. My investment thesis is more neutral on Shopify until the end of the retail crisis, but the stock valuation is significantly more attractive here with over 80% decline from the highs.

Stock split

Just about anyone with basic investment knowledge knows that a stock split provides no economic benefit to shareholders. A stock split can cause new higher momentum in an uptrend stock, just as a reverse split can create more downside from a downtrend stock. Either way, an investor still has the same ownership position in the company as before the stock split, just more shares in this case.

Shopify completed a 10-to-1 split on June 29. During the COVID e-commerce surge, the stock traded at a high of $1,763, where a split was likely warranted to make trading by retail investors and options more accessible. The stock crashed before the split, however, and now the company finds shares trading at $31 and possibly heading towards $20.

SHOP Charter

Source: FinViz

Since stock price levels are seen as a matter of strength, Shopify back in the $20s doesn’t give off the best vibes. If the stock were to drop much further, Shopify might regret such a large split that once seemed logical when a 10-to-1 split would have left the stock still trading above $100.

Not done growing

The e-commerce infrastructure platform providing retailers with the solutions to operate online is still expected to register strong growth in the coming years. The retail sector is struggling right now, as evidenced by weak Bed, Bath and Beyond (BBBY) numbers, but the market is extrapolating those results far into the future. The current weakness is largely due to the advance of COVID, making comps difficult despite retailers still reporting strong numbers versus 2019.

Shopify saw explosive growth in 2020 and early 2021 as retailers flocked to the platform looking for any solution to make online sales. With the company offering an alternative to selling goods on Amazon (AMZN), Shopify was in high demand. The company saw the growth rate peak at 110% in the first quarter of 2021, making the recently released quarterly results impressive to generate an additional 22% sales growth on top of these growth rates. Shopify only recorded $320 million in revenue in Q1 2019 and hit $1.2 billion in Q1 22, growing 275% over the period.

Revenue increase
Data by YCharts

As the company chatted with investors, GMV growth was boosted during the COVID shutdown period. Shopify reporting any growth in 2022 is actually quite impressive.

GMV growth has accelerated over the past two years

Source: Shopify Q1’22 presentation

The market doesn’t really care, either because investors lose interest when growth stories are in trouble, or because algos run wild with decelerating growth. Regardless, the stock is now trading at the lowest P/S ratio since Shopify went public at 8.7x sales. Stock valuations swept to the top along with most tech stocks.

Chart
Data by YCharts

The stock is trading at around 5x the 2023 sales target of $7.7 billion. With a cash balance of $7.25 billion and net cash of approximately $6.34 billion, Shopify has an impressive balance sheet to fund future growth initiatives.

The Deliverr deal will require Shopify to spend $1.7 billion in cash to pay for the deal to acquire the fulfillment technology provider. Prior to the Deliverr deal, Shopify’s enterprise value was just 4x sales estimates, offering one of the best prices to hold the stock since its IPO, while growth prospects remain strong. Many analyst estimates indicate that the company will return to growth rates of 30% once the normalization period ends in 2023.

Shopify was profitable in Q1’22, although the company is bottoming out in profitability in the current period. The e-commerce platform continued to invest in building the platform despite the reduced growth rates. Either way, Shopify has the cash balance and revenue to survive and thrive in the current downturn in the retail industry.

Carry

The main investor takeaway is that the stock split gimmick definitely didn’t work for Shopify. The stock had no momentum before the split and the lack of economic value for shareholders simply provided more shares to sell. As the stock bottoms out in the next quarter, investors should consider buying shares of the leading e-commerce platform at a much more reasonable valuation now.

About Jason Norton

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