Shopify (SHOP)

E-commerce platform Shopify (NYSE:SHOP) reported Q3 CY2025 results topping the market’s revenue expectations, with sales up 31.5% year on year to $2.84 billion. On top of that, next quarter’s revenue guidance ($3.59 billion at the midpoint) was surprisingly good and 3.1% above what analysts were expecting. Its GAAP profit of $0.20 per share was 21.4% below analysts’ consensus estimates.

Company Overview

Starting with just three people selling snowboards online in 2004, Shopify (NYSE:SHOP) provides a comprehensive platform that enables merchants of all sizes to create, manage and grow their businesses across multiple sales channels.

While e-commerce has been around for over two decades and enjoyed meaningful growth, its overall penetration of retail still remains low. Only around $1 in every $5 spent on retail purchases comes from digital orders, leaving over 80% of the retail market still ripe for online disruption. It is these large swathes of the retail where e-commerce has not yet taken hold that drives the demand for various e-commerce software solutions.

Shopify competes with other e-commerce platforms such as BigCommerce (NASDAQ:BIGC), WooCommerce (owned by Automattic), Adobe Commerce (formerly Magento) (NASDAQ:ADBE), as well as broader commerce solutions from companies like Amazon (NASDAQ:AMZN) with its Amazon Webstore, and Salesforce (NYSE:CRM) with its Commerce Cloud.

A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Luckily, Shopify’s sales grew at an excellent 34.2% compounded annual growth rate over the last five years. Its growth surpassed the average software company and shows its offerings resonate with customers, a great starting point for our analysis.

Long-term growth is the most important, but within software, a half-decade historical view may miss new innovations or demand cycles. Shopify’s annualized revenue growth of 26.8% over the last two years is below its five-year trend, but we still think the results suggest healthy demand.

This quarter, Shopify reported wonderful year-on-year revenue growth of 31.5%, and its $2.84 billion of revenue exceeded Wall Street’s estimates by 3.1%. Company management is currently guiding for a 27.5% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 21.8% over the next 12 months, a deceleration versus the last two years. We still think its growth trajectory is attractive given its scale and indicates the market sees success for its products and services.

GMV, or gross merchandise value, is the total value of goods and services sold on Shopify’s platform. This is the number from which the company will ultimately collect fees (usually called a take rate), and the higher it is, the higher the switching costs, enabling Shopify to monetize in additional ways (like subscription revenue for more services).

Shopify’s GMV punched in at $92.01 billion in Q3, and over the last four quarters, its growth was fantastic as it averaged 27.8% year-on-year increases. This alternate topline metric grew slower than total sales, meaning its revenue from adjacent products such as merchant loans and AI-driven inventory management software outpaced its transaction fees. This signals the company is locking its customers further into its platform and mining them for profits.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Shopify is extremely efficient at acquiring new customers, and its CAC payback period checked in at 5.5 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation due to its scale. These dynamics give Shopify more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.

For software companies like Shopify, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Shopify’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 48.7% gross margin over the last year. Said differently, Shopify had to pay a chunky $51.25 to its service providers for every $100 in revenue.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Shopify has seen gross margins decline by 0.1 percentage points over the last 2 year, which is slightly worse than average for software.

Shopify produced a 48.9% gross profit margin in Q3, marking a 2.8 percentage point decrease from 51.7% in the same quarter last year. Shopify’s full-year margin has also been trending down over the past 12 months, decreasing by 2.2 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs.

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Shopify has been an efficient company over the last year. It was one of the more profitable businesses in the software sector, boasting an average operating margin of 12.2%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Looking at the trend in its profitability, Shopify’s operating margin rose by 1.2 percentage points over the last two years, as its sales growth gave it operating leverage.

In Q3, Shopify generated an operating margin profit margin of 12.1%, down 1 percentage points year on year. Since Shopify’s gross margin decreased more than its operating margin, we can assume its recent inefficiencies were driven more by weaker leverage on its cost of sales rather than increased marketing, R&D, and administrative overhead expenses.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Shopify has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 17.8% over the last year, slightly better than the broader software sector.

Shopify’s free cash flow clocked in at $507 million in Q3, equivalent to a 17.8% margin. The company’s cash profitability regressed as it was 1.6 percentage points lower than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends are more important.

Over the next year, analysts’ consensus estimates show they’re expecting Shopify’s free cash flow margin of 17.8% for the last 12 months to remain the same.

Big corporations like Shopify are attractive to many investors in times of instability thanks to their fortress balance sheets that buffer pockets of soft demand.

Shopify is a profitable, well-capitalized company with $6.35 billion of cash and $1.12 billion of debt on its balance sheet. This $5.23 billion net cash position is 2.3% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We enjoyed seeing Shopify beat analysts’ gross merchandise volume expectations this quarter. We were also glad its revenue guidance for next quarter exceeded Wall Street’s estimates. Overall, we think this was a solid quarter with some key areas of upside. Investors were likely hoping for more, and shares traded down 3.5% to $166.53 immediately after reporting.

Updated: December 4, 2025 at 9:14 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Shopify.

Shopify is truly a cream-of-the-crop software company. First of all, the company’s revenue growth was impressive over the last five years. And while its gross margins show its business model is much less lucrative than other companies, its efficient sales strategy allows it to target and onboard new users at scale. On top of that, Shopify’s gross merchandise volume has soared, showcasing high user engagement and robust platform activity.

Shopify’s price-to-sales ratio based on the next 12 months is 15.7x. You get what you pay for, and in this particular situation, Shopify’s higher valuation multiple is justified. We think it’s one of the best businesses in our coverage and deserves a spot in your portfolio.

Wall Street analysts have a consensus one-year price target of $175.43 on the company (compared to the current share price of $162.46), implying they see 8% upside in buying Shopify in the short term.