The high growth story was severely tested and caused Shopify's (SHOP.US) stock price to plummet after its performance! Xiaomo bucked the power: the profit growth framework is unwavering
The Zhitong Finance App learned that after Canadian e-commerce giant Shopify (SHOP.US) announced its third-quarter results, the stock price closed down 8.74% on Tuesday. Although earnings performance exceeded expectations and the holiday season guidelines were generally in line with market expectations, the two indicators supporting the stock's overvaluation — platform trading volume and gross profit — did not reach the growth rate some institutions are betting on, and have become important factors dragging down the stock's performance.
According to financial reports, Shopify's third-quarter revenue increased 32% year over year to US$3.742 billion, which is basically in line with market expectations; adjusted earnings per share were $0.49, better than market expectations of $0.46. Total commodity transaction volume (GMV) increased 29.5% year over year to US$11.145 billion, lower than the market consensus estimate of US$119.9 billion quoted by the Royal Bank of Canada (RBC). Gross profit increased 28% year over year, falling short of the range of about 31% to 32% of the latest expectations of the Morgan Stanley strategist team.
The holiday season guidelines are also insufficient to drive profit expectations to improve significantly. Shopify expects revenue growth of around 30% year-on-year in the fourth quarter, with gross profit increasing close to 30% but less than 30%. Wall Street's predictions for the two were about 30% and 28%, respectively, before earnings were released. The company expects free cash flow to be about 19% in the same period last year. In other words, the guidelines are generally in line with consensus and do not predict a sharp decline in consumption. However, according to estimates before Damo's earnings report, Shopify's stock price at the time was about 60 times the expected free cash flow in 2027, while the average value of large software companies was about 36 times. Under such a valuation, “maintaining strong growth” and “growing strong enough to raise the valuation” are two different thresholds.
However, J.P. Morgan Chase pointed out in a newly released research report that after announcing the third quarter results, the bullish logic for Canadian e-commerce giant Shopify (SHOP.US) continued until 2027. Although there are still two key disputes to pay attention to, including: 1) How will the company achieve continuous 30% revenue growth? ; 2) Are the current higher cost levels only temporary?
Xiaomo said that in terms of revenue growth, Shopify has achieved a year-on-year increase of more than 30% in total product transaction volume (GMV) and revenue for six consecutive quarters. This performance has benefited from strong overall growth in merchants of various sizes, sales channels, and geographical regions. Shopify continues to expand its market share: the company's compound annual growth rate (CAGR) of the US online sales market has reached 23% in the past three years, far exceeding the 8% growth rate of the overall e-commerce market in the US; at the same time, Shopify's compound annual growth rate in the European e-commerce market has reached 37% in the past three years, which is also higher than the 8% growth rate of the overall European e-commerce market.
Since the beginning of 2025, Shopify has now contributed about 50% of new sales in the US e-commerce market and more than 40% of new sales in the European market. By comparison, three years ago, the proportion was around 20% in the US and 25% in Europe.
The execution and transaction volume of the enterprise-level business is still climbing strongly, but there are differences in the degree of use of various solutions by merchants of different sizes, and the enterprise-level business continues to drive the company's incremental revenue growth. Given the strong performance of merchants of all sizes, customer groups, sales channels and geographical regions, Xiaomo is still optimistic that Shopify will continue to achieve revenue growth of more than 30% during the “Black Friday to Cyber Monday” (BFCM) shopping season, and does not believe that the company is facing macroeconomic pressure. The bank expects Shopify's fourth quarter revenue to grow 33% (34% at a fixed exchange rate) and 29% in 2027 (29% at a fixed exchange rate).
In terms of costs, Shopify is driving a month-on-month decline in artificial intelligence (AI) related costs through model selection, model distillation, and caching technology; infrastructure spending is temporarily at a high level until the end of the year; and the month-on-month increase in marketing spending in the fourth quarter reflects that the company adjusted its spending schedule after testing incremental effects in the third quarter, rather than a structural change in marketing philosophy.
More importantly, since 2026, the absolute growth rate of Shopify's gross profit has always been higher than the growth rate of operating expenses. Komo expects that in 2027, all of the company's non-GAAP fee projects will achieve a year-on-year cost leverage effect.
Beyond the fundamentals, Shopify remains a key leader in the agency-based commerce ecosystem. With data accumulated over 20 years, the company is expected to become an operating system for the entire business sector. AI integration continues to bring high conversion traffic to merchants, and Sidekick helps merchants accelerate product roadmaps.
Xiaomo specifically explained the core ideas of Shopify's third quarter earnings call, including:
1. Shopify continues to expand its wallet share, and the growth momentum is widely distributed
Shopify has achieved a year-on-year increase in GMV and revenue of more than 30% for six consecutive quarters, thanks to strong overall growth in merchants of all sizes, sales channels, and geographic regions. Consistent with previous quarters, the company's growth was still being driven by same-store sales (SSS) growth and new merchant acquisition, which remained balanced.
In terms of merchant size, the merchant group with an annual GMV of 2 million to 25 million US dollars contributed the most new GMV, while the group of merchants with an annual GMV of more than 25 million US dollars is still the fastest growing group.
The execution and transaction volume of the enterprise-level business continues to rise strongly. However, there are differences in the degree to which merchants of different sizes and use of various solutions, and the enterprise-level business continues to drive the company's incremental revenue growth.
The payment business penetration rate increased by about 300 basis points year over year, reaching about 68%; Shop Pay's GMV increased 50% year over year. The advertising business and other solutions have also grown.
Subscription Solutions (Subscription Solutions) continues to benefit from the strong performance of the Standard and Plus packages, as well as the increase in variable platform fees. This increase is supported by both the fact that more merchants have exceeded the minimum transaction volume threshold (MVT) and that larger merchants continue to grow in sales, which is supported in a balanced manner.
From a geographical perspective, benefiting from localized payment services, Shopify's European GMV grew 33% year-on-year at a fixed exchange rate; at the same time, the company continues to expand its business layout in the Asian and Latin American markets.
Given the strong performance of merchants of all sizes, customer groups, sales channels and geographical regions, Xiaomo is still optimistic that Shopify will continue to achieve revenue growth of more than 30% during the BFCM shopping season, and does not believe that the company is facing macroeconomic pressure. The bank expects Shopify's fourth quarter revenue to grow 33% (34% at a fixed exchange rate) and 29% in 2027 (29% at a fixed exchange rate).
2. The framework for profitable growth remains unchanged
Although incremental AI spending around Sidekick continues to weigh on profit margins year over year, Shopify is driving month-on-month cost improvements through model selection, model distillation, and caching technology. Currently, the number of conversations between merchants and Sidekick is up 14% month-on-month, but the cost of each conversation is down 28% month-on-month, and the total cost of Sidekick is down 18% month-on-month. Infrastructure spending is also at a high level because Shopify is purchasing computing power capacity in advance for the BFCM shopping season, improving search functionality, and supporting Sidekick.
In addition to infrastructure spending, on the marketing side, Shopify adjusted some of its marketing expenses from the third quarter to the fourth quarter. Previously, the company suspended some marketing expenses in order to carry out incremental effectiveness tests. However, Shopify's marketing strategy hasn't changed, and it still adheres to strict spending thresholds and discipline.
More importantly, since 2026, the absolute growth rate of Shopify's gross profit has always been higher than the growth rate of operating expenses. Komo expects that in 2027, all of the company's non-GAAP fee projects will achieve a year-on-year cost leverage effect. The bank expects that in 2027, the absolute gross profit of Shopify will increase by 26% year on year, and the free cash flow margin will reach 20.4%, an increase of 150 basis points over the previous year.
3. Agency-based commerce continues to bring high conversion rate traffic and empower merchants
Currently, merchants are focusing on two realistic goals that Shopify is helping them achieve: 1) building the future of agency-based commerce; and 2) driving the growth of the current online store business.
Shopify reiterated that the company continues to be the commerce operating system for agency-based commerce and supports this ecosystem through integrations with partners such as Muse, Instinct, Claude Duet, and Grok Bot. The company is driving product discovery across all major AI channels.
Shopify's Catalog is based on more than 20 years of business data and currently contains more than 1 billion products. The conversion rate of traffic from Catalog is about twice that of ordinary AI search traffic.
Core agency traffic increased 2.6 times year over year, and related order volume increased 3.3 times; compared with organic search, AI-driven shoppers were about 64% more likely to complete conversion.
Agency commerce is continuing to expand the total potential market size (TAM). In the third quarter, approximately 74% of AI shopping transactions came from product categories other than the top 100.
The number of daily active merchants on Sidekick increased 3.7 times year over year, and the number of daily sessions increased 4.2 times; in the third quarter, Sidekick created approximately 67% of all workflows (flows).
Sidekick also supports Canvas to help merchants launch more personalized online stores about 20% faster.
Sidekick is helping merchants scale up GMV. Komo believes that Shopify still has long-term pricing capabilities, but the company's short-term focus is still on driving merchant growth.
Overall, given Shopify's leading edge in AI channel distribution, Shop Pay enablement, Sidekick, Catalog, and Universal Commerce Agreement (UCP), Xiaomo continues to believe that the company is well-positioned in the field of agency commerce and is expected to become a leader in this field.
According to Komo, Shopify is still its preferred target and has been selected on the J.P. Morgan Chase analysts' focus list. The bank expects the company's revenue to grow by 29% in 2027, the absolute gross profit increase by 26% year on year, and the free cash flow (FCF) margin will reach 20.4%, up 150 basis points year on year.
Komo reiterated the “plus” rating on Shopify, with a target price of $200 as of December 2027. The target price is estimated at about 23 times the company's projected gross profit of US$11.1 billion in 2028, and is further supported by the bank's discounted cash flow (DCF) model. The bank expects that GMV and revenue growth, along with the company's continued cost discipline and improved operating efficiency, will drive a steady expansion of operating profit margins and free cash flow margins.