Shopify: Imperfection is Unacceptable, the Original Sin of High Valuation?

As the most watched hot target in the current e-commerce AI field—$Shopify (SHOP.US) announced its Q3 2025 financial report before the U.S. stock market opened on the evening of November 4th. Overall, the growth performance remains quite strong, with GMV growth accelerating sequentially on a high base, but due to narrowing gross margins, expenses have returned to an expansion cycle, and the profit margin contraction year-on-year has widened, which is not considered good. Specifically:

1. Strong GMV growth, the source of all surprises: Within the Shopify ecosystem, GMV this season reached $9.2 billion, up 32% year-on-year, further accelerating on the basis of last season's not low level, significantly outperforming expectations. Even excluding the favorable impact of exchange rates, the growth rate still increased by 1pct sequentially. According to disclosures, in the three main sub-growth directions, the growth rates of international markets and offline markets have accelerated compared to last season.

Meanwhile, the penetration rate of Shopify payments in the ecosystem's GMV also increased by 0.5pct sequentially to 65.4%, driving the growth rate of payment GPV to reach 40%, higher than the GMV growth rate, also outperforming expectations.

2. Service monetization rate continues to steadily improve: The service monetization rate calculated by merchant service revenue/GMV increased by about 10bps year-on-year to 2.33% this season (contributed by changes in PayPal's revenue criteria, and the aforementioned increase in payment penetration rate is also due to this).

Therefore, merchant service revenue this season was $2.15 billion, up nearly 39% year-on-year, with strong GMV growth and rising monetization rates resonating, revenue growth was higher and continued to accelerate.

3. Subscription business continues to "hover at low levels": The underlying indicator of the subscription business—MRR (Monthly Recurring Revenue) this season was $193 million, up 10.3% year-on-year, showing some improvement sequentially but still hovering at low levels. It should mainly be affected by free trials. The adverse impact mentioned above was partially offset by the growth of more high-level subscriptions (Plus).

Correspondingly, subscription service revenue this season grew by 14.6% year-on-year, with a sequential slowdown of nearly 2pct, also relatively weak, but generally in line with market expectations.

4. Gross margin decline more than expected: Due to free trial activities in the subscription business and changes in PayPal's business criteria, although beneficial to revenue, they negatively impacted gross margins. This season, the gross margins of both subscription and merchant services continued to narrow year-on-year.

Among them, the subscription business was weakened by the impact of free trials, with the year-on-year decline in gross margin narrowing to 0.6pct. However, the decline in merchant service gross margin expanded to 1.5pct. It should be due to the lower gross margins of companies in faster-growing areas such as international markets and large merchants.

With the increase in the proportion of low-margin service revenue, the overall gross margin narrowed by about 2.8pct year-on-year, below market expectations. The total gross profit amount also only grew by about 24% year-on-year, lower than the revenue growth rate.

5. Expenses continue to grow at a high rate: This season, total expenses grew by about 25.5% year-on-year, roughly in line with last season's growth rate, maintaining a high growth rate. Since the growth rate of expense spending is higher than the growth rate of gross profit amount, it has a dilutive effect on profit margins.

Specifically, this season, the growth rate of marketing expenses and transaction loss expenses was relatively high. The former grew by nearly 24% year-on-year, reflecting the company's more aggressive attitude in customer acquisition and new business promotion. Transaction losses soared by 1.5x year-on-year, possibly due to changes in customer structure or an overall macro increase in bad debt rates.

6. Strong growth, but also "limping" profits: Due to the year-on-year narrowing of gross margins and high expense growth, this season's operating profit margin narrowed by about 1pct year-on-year. The company and the market are more concerned about free cash flow this season, about $510 million, up 20.4% year-on-year, lower than revenue and gross profit growth rates. Free cash flow profit margin was 17.8%, also narrowed by 1.6pct year-on-year, with the decline expanding compared to last season.

Dolphin Research View:

In summary, Shopify's performance this time and some other companies covered by Dolphin Research show the same trend—that is, the growth performance is quite impressive, with revenue and core business indicators showing a trend of continuous accelerated growth. However, due to product structure sinking or similar reasons, and the impact of expenses re-entering the investment cycle, the profit margin not only did not improve due to scale effects but showed an increasingly obvious contraction trend.

Ultimately, it presents a cycle of continuously accelerating revenue growth, but slowing profit growth, a paradox of increasing revenue without increasing profit. Shopify's performance this time is typical.

Similarly, according to the company's guidance, next quarter's total revenue growth rate is still around 25%~29%, higher than Bloomberg's consensus expectation of 24%, with growth still exceeding expectations. But the guidance for next quarter's FCF profit margin will only be slightly higher than this season (17.8%), based on this tone, it is unlikely to exceed 20% or even lower. That is, compared to last year's 21.7%, there will be a greater degree of narrowing. This guidance implies that next quarter's FCF year-on-year growth rate may only be around 10%.

It suggests that next quarter will also have good growth performance, but the situation of profit deterioration will be more severe. It further solidifies and amplifies concerns about the "increasing revenue without increasing profit" issue.

On the business level, combined with research from foreign banks, the driving forces behind Shopify's sustained high GMV growth in recent quarters mainly include the following points: 1) penetration into medium and large enterprises, Shopify mainly served small and medium merchants without self-research capabilities in the past, but recently the company has made significant progress in acquiring enterprise merchants, thus driving GMV growth, also matching the situation where large customers can contribute lower gross margins and profit margins; 2) expansion into overseas markets, especially Europe, according to reports, the company recently launched the Shopify payment function in multiple small countries in Europe, increasing the total number of covered countries from 20+ to 40+, thus promoting international business growth.

In addition to the above two directions with actual progress, the considerable imagination space of AI and Agent in the e-commerce sector is also one of the main factors driving the company's stock price performance to significantly outperform recently. However, since similar functions are still in the early stages, and there are no more details disclosed about the cooperation with OpenAI, logically, this indeed has the potential to bring more growth space to the company from a long-term perspective. But the actual contribution to the company's performance in the short to medium term should still be relatively limited and difficult to predict.

As for valuation, it is also one of Shopify's main issues currently. Due to the recent significant rise, the company's current market value is about $210 billion. The market's current expectation for FCF in 2027 is generally around $3 billion to $3.5 billion, corresponding to a valuation of about 60x~70x. Even based on P/S valuation, the corresponding revenue in 2027 is about 13x. The valuation based on profit is almost unacceptable, and the P/S valuation is also at a medium to high level among SaaS companies.

Under quite full valuation and expectations, imperfection is almost equivalent to failure. Therefore, although the company's performance on the growth side is considered unassailable strong, the increasingly clear trend of increasing revenue without increasing profit still makes the bullish logic of the company not as smooth as the previous quarter.

Below is a detailed commentary

I. GMV growth continues to accelerate sequentially, growth remains strong

The most important growth indicator—within the ecosystem, GMV this season reached $9.2 billion, up 32% year-on-year, further accelerating on the basis of last season's already significant acceleration, once again significantly outperforming expectations, growth is very strong. Even excluding the favorable impact of exchange rates this season, GMV growth rate still increased by 1pct sequentially.

According to disclosures in the conference call, in the three main sub-markets, the year-on-year growth rates of international markets and offline markets have also accelerated compared to last season, only the growth rate of B2B business has slightly slowed down.

At the same time, Shopify's payment penetration rate in the ecosystem's GMV also increased by 0.5pct sequentially to 65.4%, driving the payment amount GPV growth rate to still outperform GMV growth rate, reaching 40%.

Both core business indicators GMV and GPV growth rates significantly outperformed market expectations by about 3%~5%.

II. MRR growth still hovering at low levels

The core indicator of the subscription business—MRR (Monthly Recurring Revenue) this season was $193 million, up 10.3% year-on-year, still hovering at low levels, and below Bloomberg's consensus expectation of $195 million, still affected by the previously promoted free trial period of up to 6 months. According to company disclosures, the adverse impact mentioned above was partially offset by the growth of high-level subscriptions—Plus subscription revenue, contributing 35% of subscription recurring revenue this quarter (similar to last quarter).

III. Merchant service monetization rate continues to steadily improve

In terms of revenue, due to the relatively sluggish MRR growth, subscription service revenue this season grew by 14.6% year-on-year, with a sequential slowdown of nearly 2pct, but generally in line with market expectations.

As for merchant service revenue this season was $2.15 billion, up nearly 39% year-on-year, driven by strong GMV growth, revenue growth also continued to accelerate sequentially. Calculated by merchant service revenue/GMV, the merchant service monetization rate increased by about 10bps year-on-year to 2.33%, with contributions from changes in PayPal's revenue criteria. Over the past four quarters, the year-on-year increase in monetization rate has hovered around 10bps, showing a continuous and stable upward trend in Shopify's monetization rate.

Overall, although subscription revenue growth this season still showed no significant improvement, the higher proportion of merchant service revenue accelerated growth, so this season's total revenue growth rate reached 31.5%, also slightly accelerated by about 0.4pct sequentially, higher than market expectations.

IV. Gross margin continues to be under pressure, subscription decline narrows, merchant service expands

Due to free trial activities in the subscription business and changes in PayPal's business criteria, although beneficial to revenue, they negatively impacted gross margins. This season, the gross margins of both subscription and merchant services continued to narrow year-on-year.

Specifically, the subscription business was weakened by the impact of free trials, with the year-on-year decline in gross margin narrowing to 0.6pct. However, the decline in merchant service gross margin expanded to 1.5pct. Dolphin Research believes that it should be due to the lower gross margins of companies in faster-growing areas such as international markets and large merchants.

V. Expenses continue to grow at a high rate, profit margin contraction expands

While gross margins narrowed, the company's operating expense spending also grew relatively high, with total expenses growing by about 25.5% year-on-year, roughly in line with last season's growth rate. Expense spending growth rate is higher than the growth rate of gross profit amount, thus having a dilutive effect on profit margins. (Since PayPal's business criteria do not affect gross profit amount, comparing gross profit growth rate is more objective)

Specifically, this season, the growth rate of marketing expenses and transaction loss expenses was relatively high. The former grew by nearly 24% year-on-year, reflecting the company's more aggressive attitude in customer acquisition and new business promotion. Transaction losses soared by 1.5x year-on-year, reflecting an increase in the situation where consumers are unable to complete payments (possibly due to changes in customer structure or an overall macro increase in bad debt rates).

Overall, due to the year-on-year narrowing of gross margins and relatively high expense growth, this season's operating profit margin narrowed by about 1pct year-on-year. The company and the market are more concerned about free cash flow of about $510 million, up 20.4% year-on-year, underperforming revenue and gross profit growth rates. Meanwhile, free cash flow profit margin was 17.8%, narrowed by 1.6pct year-on-year. This is the first time since 2023 that there has been such a degree of contraction.

Similarly, despite the continuous acceleration of business growth and quite strong performance, profit performance is relatively average, and profit margins have entered a contraction trend.