In addition to announcing a 10-for-1 stock split in mid-April, Shopify (SHOP) also shook up its share structure.
The move gives greater power to CEO and founder Tobi Lütke.
If you care about corporate governance, this is a bad move for owners of SHOP stock.
Shopify (SHOP) on the phone display.
Source: Burdun Iliya / Shutterstock.com
Most of the April 11 headlines about Shopify (NYSE:SHOP) revolved around its proposed 10-for-1 stock split. For whatever reason, CEOs and corporate boards have gone bonkers for stock splits despite the fact the verdict is still out on whether they matter. Shopify’s announcement has done little to keep SHOP stock from continuing to trade lower. It’s down 28% since the announcement.
Although there has been some media coverage of Shopify’s other April 11 announcement solidifying Tobi Lütke’s power, it’s been relatively muted. InvestorPlace’s Joel Baglole did give it a paragraph in his coverage of the company’s stock split.
I’ve been a fan of Tobi Lütke of Shopify for a long time, partly because it’s a Canadian company and partly because it gives Jeff Bezos a kick in the pants. However, with the latest change by Shopify, I’ll have a much harder time being bullish about its future.
Shopify’s Take on Governance Structure and SHOP Stock
Shopify announced the change in a separate press release from the stock split. The change will create a new class of shares called the Founder share. It will be a variable number of votes that enables Lütke to retain 40% of the company’s total voting power.
It included stipulations that would effectively cancel out the Founder share’s usefulness to lessen the corporate governance blowback.
For example, were Lütke to cease being a part of the company as CEO, board member, or paid consultant, the Founder share would sunset, and he would convert all of his Class B shares (10 votes each) into Class A (1 vote).
Another stipulation would be if Lütke and his family no longer held Class A and Class B shares totaling more than 30% of his current Class B shares held — 7.89 million Class B shares as of March 31 — or 2.37 million, the Founder share would sunset.
In addition, the new Founder share does have inter-generational restrictions that prohibit Lütke from passing the voting power to his kids.
Here’s what the company said about the move:
“The proposal, if approved by shareholders and as detailed below, will modernize Shopify’s governance structure and allow Shopify to remain mission-driven and merchant-obsessed while sustaining an innovative culture,” the April 11 press release stated.
The proposal will also strengthen the foundation for long-term stewardship by Mr. Lütke, a proven leader who has delivered significant shareholder value since the Company’s IPO. This stability of leadership is expected to cement the Company’s focus on the long-term to the lasting benefit of merchants, employees and shareholders.
The date to approve the move is June 7 at the company’s annual meeting.
What’s Concerning About the Move?
The most troubling part of the company’s move to solidify Lütke’s power and control over Shopify is that it comes when Shopify, the business, and SHOP stock, have both shown cracks in their armor.
InvestorPlace’s Larry Ramer recently argued that Shopify is not the best way to play a growth stock recovery. He believes that its valuation is still too high despite the declines in its share price in 2022 — it’s down 66% year-to-date — plus, its earnings this year won’t be nearly as good as in past years.
In early April, I called SHOP a buy in the low $700s. Of course, we know in hindsight that it got hammered throughout April, losing 36% from April 4, the date of my call, through April 29.
Despite the carnage, half the 42 analysts covering its stock still rate SHOP as a “Buy” with a median target price of $849.75. Clearly, they don’t have nearly as big a concern about Lütke’s consolidation of power.
When it comes to dual-class share structures, I’ve often been very supportive of them. In 2019, I pointed out seven dual-class stocks I thought would outperform over the long haul. All of them have done so.
I wrote in March 2019:
Love them or hate them, dual-class share structures will always be attractive to entrepreneurs who worry that the short-termism that’s so prevalent in Wall Street companies is harmful to a company’s long-term success…
What Should Investors Do?
Given my stance on dual-class share structures, you would think that I would be 100% for Shopify’s move to give Lütke the control he needs to execute his long-term strategy for the company.
That’s not the case.
While I had no problem with its Class A and Class B share structure when it went public in 2015, I have a hard time getting my head around arguments made by some in the press that this is a positive move for investors.
Sure, this move puts a practical time limit on Lütke’s ability to control the company beyond his or his family’s involvement with the company. Still, it cements his power when the company is struggling to grow its business at the brisk pace investors have grown accustomed to.
If you own the stock and are sitting on profits, I might consider taking some gains off the table. If you own it and are underwater, I’d continue to hold but watch it like a hawk. If you don’t own it, I might take half a position given its low price and wait for a sign that its stock has bottomed.
On the date of publication, Will Ashworth 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.comPublishing Guidelines.
