Shopify (SHOP)

E-commerce software platform Shopify (NYSE:SHOP) announced better-than-expected revenue in Q1 CY2025, with sales up 26.8% year on year to $2.36 billion. Guidance for next quarter’s revenue was optimistic at $2.56 billion at the midpoint, 2.2% above analysts’ estimates. Its GAAP loss of $0.53 per share was significantly below analysts’ consensus estimates.

Company Overview

Originally created as an internal tool for a snowboarding company, Shopify (NYSE:SHOP) provides a software platform for building and operating e-commerce businesses.

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.

Other providers of e-commerce software include: BigCommerce (NASDAQ:BIGC), GoDaddy (NYSE:GDDY), and Squarespace (NYSE:SQSP)

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. Thankfully, Shopify’s 24.8% annualized revenue growth over the last three years was solid. Its growth surpassed the average software company and shows its offerings resonate with customers, a great starting point for our analysis.

This quarter, Shopify reported robust year-on-year revenue growth of 26.8%, and its $2.36 billion of revenue topped Wall Street estimates by 1.1%. Company management is currently guiding for a 25% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 19.7% over the next 12 months, a deceleration versus the last three years. Still, this projection is commendable and implies 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 $74.75 billion in Q1, and over the last four quarters, its growth was impressive as it averaged 23.7% 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 represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Shopify is extremely efficient at acquiring new customers, and its CAC payback period checked in at 6.9 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. 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 49.9% gross margin over the last year. That means Shopify paid its providers a lot of money ($50.06 for every $100 in revenue) to run its business.

This quarter, Shopify’s gross profit margin was 49.5%, down 1.9 percentage points year on year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Shopify has been a well-oiled machine over the last year. It demonstrated elite profitability for a software business, boasting an average operating margin of 12.7%. 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 28.1 percentage points over the last year, as its sales growth gave it immense operating leverage.

In Q1, Shopify generated an operating profit margin of 8.6%, up 4 percentage points year on year. The increase was encouraging, and because its gross margin actually decreased, we can assume it was more efficient because its operating expenses like marketing, R&D, and administrative overhead grew slower than its revenue.

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 robust cash profitability, driven by its cost-effective customer acquisition strategy that enables it to invest in new products and services rather than sales and marketing. The company’s free cash flow margin averaged 18.4% over the last year, quite impressive for a software business.

Shopify’s free cash flow clocked in at $363 million in Q1, equivalent to a 15.4% margin. This result was good as its margin was 2.9 percentage points higher than in the same quarter last year, but we note it was lower than its one-year cash profitability. Nevertheless, we wouldn’t read too much into a single quarter because investment needs can be seasonal, causing short-term swings. Long-term trends carry greater meaning.

Over the next year, analysts’ consensus estimates show they’re expecting Shopify’s free cash flow margin of 18.4% for the last 12 months to remain the same.

Companies with more cash than debt have lower bankruptcy risk.

Shopify is a profitable, well-capitalized company with $5.51 billion of cash and $1.14 billion of debt on its balance sheet. This $4.38 billion net cash position is 3.6% 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.

It was encouraging to see Shopify beat on revenue and provide revenue guidance for next quarter above analysts’ expectations. On the other hand, its GMV missed slightly and Q2 gross profit guidance was lowered, reflecting gross margin pressure on the business. Overall, this was a softer quarter. The stock traded down 8.8% to $86.24 immediately following the results.

Updated: May 21, 2025 at 10:18 PM EDT

Before making an investment decision, investors should account for Shopify’s business fundamentals and valuation in addition to what happened in the latest quarter.

Shopify is an amazing business ranking highly on our list. For starters, its revenue growth was solid over the last three 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 expanding operating margin shows it’s becoming more efficient at building and selling its software.

Shopify’s price-to-sales ratio based on the next 12 months is 11.7x. Scanning the software space today, Shopify’s fundamentals really stand out, and we like it at this price.

Wall Street analysts have a consensus one-year price target of $114.64 on the company (compared to the current share price of $102.48), implying they see 11.9% upside in buying Shopify in the short term.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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