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Stock Split or Not: 3 Stock to Avoid

Amid the stock split trend, irrespective of whether Shopify (SHOP), MercadoLibre (MELI), and Doximity (DOCS) are undergoing a stock split in the near term or not, these stocks aren’t well-positioned to survive the market slump. So, they are best avoided now. Let’s discuss…

Companies with substantially high share prices typically split their stocks. A stock split lowers the price of a stock and increases the number of outstanding shares with no change in the company’s market capitalization and other financial metrics. It improves trading liquidity and makes the stock seem more affordable to investors.

The Federal Reserve’s tightening of monetary policy to combat inflationary pressure and the rising recession worries have led to bearish sentiment in the stock market, and stocks are expected to plummet further. The major stock indices wrapped up their worst first half in more than 50 years. The benchmark S&P 500 has plunged 19.7% year-to-date, while Dow Jones has dropped 14.4%.

While Shopify Inc. (SHOP) is on the verge of undergoing a 10-for-1 stock split, many expect MercadoLibre, Inc. (MELI) and Doximity, Inc. (DOCS) to follow suit. However, none of these stocks are well-positioned to survive the current market slump, given their bleak fundamentals. So, these stocks are best avoided now.

Shopify Inc. (SHOP)

Headquartered in Ottawa, Canada, SHOP is a commerce company that provides a commerce platform and services in Canada, the United States, Europe, the Middle East, Africa, the Asia Pacific, and Latin America. The company’s platform enables merchants to display, manage, market, and sell their products through various sales channels.

In addition, SHOP sells custom themes, apps, and merchant solutions, including accepting payments, shipping, and securing working capital.

On June 7, SHOP’s shareholders approved the previously announced amendments to the company’s restated articles of incorporation to update its governance structure and 10-for-1 split of the company’s Class A and Class B shares at its 2022 annual general and special shareholder meeting.

In the fiscal 2022 first quarter ended March 31, 2022, SHOP's operating expenses increased 67.3% year-over-year to $735.61 million. Its loss from operations was valued at $97.98 million for the first quarter.

The company's net loss and net loss per share attributable to shareholders amounted to $1.47 billion and $11.70, respectively. Also, cash outflows from operating activities came in at $53.56 million.

Analysts expect SHOP's EPS for the fiscal 2022 second quarter (ending June 2022) to come in at $0.03, representing an 87.9% decline from the same period in 2021. Also, the consensus EPS estimate of $0.09 for the ongoing year ending December 2022 indicates a decrease of 85.4% year-over-year.

The stock has declined 77.2% year-to-date and 78.5% over the past year to close the last trading session at $31.41.

SHOP's POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of D, equating to a Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

SHOP has a grade of F for Stability and Sentiment. It has a D grade for Quality and Growth. Within the F-rated Internet - Services industry, it is ranked #29 of 31 stocks.

To see SHOP's POWR Ratings for Momentum and Value, click here.

MercadoLibre, Inc. (MELI)

MELI operates online commerce platforms in Latin America and is based in Montevideo, Uruguay. The company operates Mercado Libre Marketplace, an automated online commerce platform, and Mercado Pago FinTech, a financial technology solution platform. In addition, it provides Mercado Libre Classifieds, an online classified listing service, and Mercado Libre Ads, an advertising platform.

MELI has never split its stock. However, since the nominal price of the share is pretty high, many expect the company to initiate a stock split amid the current wave of splits.

MELI's operating expenses increased 86.8% year-over-year to $934 million in the fiscal 2022 first quarter ended March 31, 2022. The company's cash outflows from operating activities came in at $233 million, while cash outflows from investing activities amounted to $1.22 billion.

 As of March 31, 2022, MELI’s cash and cash equivalents came in at $1.57 billion compared to $2.59 billion as of December 31, 2022. Over the past five years, MELI’s EPS has declined 12.1% per annum.

MELI’s shares have dropped 46.1% over the past three months and 51.1% year-to-date to close the last trading session at $659.95.

MELI's POWR Ratings reflect its poor prospects. The company's overall D rating translates to a Sell in our proprietary rating system.

The stock has a D grade for Stability and Value. It is ranked #40 of 65 stocks in the F-rated Internet industry.

To see additional POWR Ratings (Growth, Momentum, Sentiment, and Quality) for MELI, click here.

Doximity, Inc. (DOCS)

DOCS operates a cloud-based digital platform for medical professionals in the United States. The company’s platform provides its members with tools built for medical professionals, allowing them to collaborate with their colleagues, coordinate patient care, conduct virtual patient visits, and manage their careers. It serves pharmaceutical manufacturers and healthcare systems primarily.

Similar to MELI, DOCS hasn’t initiated any stock split since its shares began trading on June 24, 2021.

In the fiscal 2022 fourth quarter ended March 31, 2022, DOCS’ operating expenses increased 50.6% year-over-year to $53.97 million. Its net other expense amounted to $16,000 for the period. In addition, its cash outflows from investing activities came in at $23.63 million.

Analysts expect DOCS’ EPS to decline 15.8% from the prior-year period to $0.16 for the fiscal 2023 second quarter (ending September 2022). Furthermore, the $0.22 consensus EPS estimate for the third quarter (ending December 2022) represents a 24.1% decline year-over-year.

The stock has plunged 26.8% year-to-date and 30.5% over the past year. It closed the last trading session at $36.72.

DOCS’ POWR Ratings reflect this bleak outlook. The stock has a D grade for Stability and Value. Within the D-rated Medical - Services industry, it is ranked #43 of 83 stocks.

To see additional POWR Ratings (Growth, Momentum, Sentiment, and Quality) for DOCS, click here.

SHOP shares were trading at $31.41 per share on Monday afternoon, up $0.17 (+0.54%). Year-to-date, SHOP has declined -77.20%, versus a -19.14% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.


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