2 reasons to buy Shopify before its stock split, 1 reason to buy after
Shopify ( STORE 4.63% ) is undoubtedly one of the technology stocks most followed by investors. The company is the industry’s leading provider of tools to help merchants build and maintain an online retail presence, attracting more than 1.7 million customers. Shopify continues to expand its offerings, most recently adding fulfillment and cross-border services to its already strong list of capabilities.
This week, the company announced a 10-for-1 stock split, the first time in company history that it has split its stock price. Investors who were considering buying the shares are faced with a conundrum: should they buy shares now? Or wait until after the stock split (expected at market close on June 28)?
There are actually compelling reasons on both sides of the argument. Let’s look at two reasons why investors should buy the stock now and one reason to wait until after the split.
Reason #1 to buy now: an attractive stock price
At the end of last year, Shopify’s stock was flying high thanks to the rapid adoption of e-commerce resulting from the pandemic. However, fears of a slowdown in online retail and the recent stock market correction conspired to drag down Shopify shares. Recent results suggest the selloff is likely overdone.
Shopify’s revenue grew 57% in 2021, while adjusted net income soared 66%. While investors would normally embrace this level of performance, the results look mediocre compared to what the company achieved in 2020, when revenue soared 86% and adjusted net income 298%.
Still, it was Shopify’s forecast that seemed to spook investors when it cited “the more measured macro environment” and said its “outlook projects full-year 2022 revenue growth below the 57% growth achieved in 2021”. Given the existing uncertainty, rising inflation, and ongoing geopolitical events, Shopify management is likely cautious in their assessment.
An apparent overreaction by investors, combined with the recent Nasdaq bear market, sent Shopify stock down about 63% and lowered its price-to-sales ratio to 17, a level not seen since early 2019. Over the same period, Shopify’s revenue jumped more than 346%, suggesting the recent sell-off is overdone. Although the stock has never been cheap using traditional valuation metrics, its robust growth often catches investors off guard, which it likely will again.
Reason #2 to Buy Now: A Big and Growing Opportunity
Shopify started as a simple set of tools to help merchants of all sizes harness the power of the internet to sell their goods and services online. Since then, however, it has gone from building websites and integrating payments to warehousing, cross-dock operations, fulfillment, working capital lending, and even solutions that cater to the complexity of international sales.
The growth opportunity for Shopify has just begun. Global e-commerce sales are expected to grow by 12% in 2022 to over $5.5 trillion and account for 20% of total retail sales.
Shopify’s software-as-a-service (SaaS) platform is the first choice for merchants selling goods and services online, and the company has historically outpaced the growth of the broader online retail market. For example, its 57% revenue growth last year far exceeded the 16% growth of the overall e-commerce market. As long as the company continues to take a bigger slice of the overall opportunity, investors will reap the rewards.
So what is this opportunity? Shopify management estimates the total addressable market for small and medium businesses at around $160 billion. To give that context, Shopify generated $4.6 billion in revenue last year, which helps illustrate the magnitude of the opportunity that remains.
1 reason to buy after: easier on the wallet
For some investors, shelling out more than $600 for a single Shopify stock could exceed what they have available to invest at any given time. However, it is possible to obtain Shopify shares at a lower cost. Investors with a limited budget have the option of purchasing fractional shares. A growing number of brokerages allow investors to invest in almost any dollar amount, allowing them to buy portions of a stock. This gives investors the ability to buy from a larger number of investments without being hampered by a high share price. It also helps with diversification.
Unfortunately, not all brokers offer fractional shares at this stage. For investors who are unable to purchase shares because it exceeds their investment budget and who do not have access to purchasing fractional shares, waiting until after the stock split might make the purchase a little more palatable. . Shopify stock currently trades at around $600 per share, but after the 10-for-1 stock split, the stock price will be around $60, allowing cash-strapped investors more flexibility.
Buy now or wait?
The answer to this age-old question depends on the personal situation of the investor. However, given Shopify’s track record of growth, the beaten stock price offers savvy investors the opportunity to get shares at a discount. In my mind, it doesn’t matter if you buy Shopify stock before or after the stock split, as long as you buy it.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.