Shopify Stock Has Taken a Beating, But a Small Position Is a Good Idea

view original post

As dull as it sounds, Chief Executive Officer Tobi Lutke’s shareholder ballot win matters for Shopify (NYSE:SHOP) investors. It will give the CEO special power and have a long-term impact on SHOP stock. Are the results good or bad for the stock?

This depends.

Granting the CEO special voting power will ensure that the company’s business objectives do not change. Shareholders will watch the company commit its investments to fuel growth. As technology stock market valuations fall to earth, Shopify must stick to its plan. Shareholders are giving up some voting rights as a result.

SHOP Shopify $326.71

SHOP Stock Split

Just as Amazon (NASDAQ:AMZN) split shares, Spotify will do so, too. Shareholders approved a 10-for-1 stock split of SHOP class A and class B shares. Alphabet (NASDAQ:GOOG) and Tesla (NASDAQ:TSLA) are also splitting shares.

The stock split has no impact on valuation. It increases liquidity, because the market will have more shares. It also increases the perceived affordability of the stock. For example, instead of buying a GOOG stock for around $2,200, investors may buy a fraction of that after the split.

When SHOP stock traded at between $1,000 and its 52-week high of $1,762.92, the split made sense. After losing 82% of its value from its high, the split is irrelevant. The worst-case scenario is that the technology stock bubble burst will send Shopify shares even lower. To prop its stock price, Shopify may reverse-split its stock in the future.

CEO’s Effective Control

Shareholders granted Shopify’s CEO a special “founder share.” Despite institutional investors calling for retail investors to object to it, the CEO won. He will control the company’s board by having a 40% total voting power.

Tobi Lutke’s 40% voting rights on Shopify stock is ultimately a positive development. As long as Lutke is an executive, director or consultant, he will retain control.

The company cannot afford to change its leadership at this time. Shopify is spending heavily to develop its fulfillment technology. It announced the acquisition of Deliverr in May 2022. It needs the technology to streamline logistics. This will give merchants simplicity and scale advantages.

Merchants need a back-end fulfillment solution. Amazon already offers fast shipping, pressuring them to do the same. That solution, Deliverr, does not come cheap. It paid $2.1 billion by paying around 80% in cash and 20% in Shopify Class A voting shares.

Shopify’s acquisition could not have come at a worse time, though. The Nasdaq’s bear market is erasing valuations for privately-held companies. In addition, Shopify’s stock is falling as markets avoid richly valued companies. Conversely, Shopify took advantage of its unsustainably high stock price with the acquisition. Had it made the deal today, it would need to offer more cash.

Wait and See on SHOP Stock

Shopify has traded in a holding pattern in the last month. Growth investors recognize that the e-commerce platform is in no immediate danger of competition. Merchants are getting more products and services from Shopify. The world continues to pivot from bricks and mortar to online shopping. This trend justifies Shopify’s valuations.

Continue holding a small position in SHOP stock.

On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.