Shopify

Shopify's second-quarter results were notably better than the firm’s outlook and FactSet consensus estimates. Revenue grew 34% year over year to USD 3.58 billion, while non-GAAP operating margin was 17.4%. Near-term guidance was better than expected on the top and bottom lines.

Why it matters: Shopify delivered strong results, with upside to our revenue and profitability estimates. Given that the firm provides directional guidance and estimate dispersion is high, results were also meaningfully better than FactSet consensus estimates on the top and bottom lines. Strong second-quarter demand was driven by gross merchandise volume, which was up 30% year over year in constant currency, as well as merchant additions, international expansion, and success in offline sales, all consistent with recent quarters. Geopolitical conflicts are still not hurting demand. Key items were ahead of our model and consistent with positive ecommerce trends. Second-quarter subscription revenue was USD 802 million, up 22% year over year, merchant solutions came in at USD 2.78 billion, up 37% year over year, and GMV hit USD 100 billion for the third straight quarter.

The bottom line: We raise our fair value estimate to USD 145/CAD 204 per share from USD 120/CAD 163 for narrow-moat Shopify. Strong results and better guidance support our estimate increases through 2028 on the top and bottom lines. We view the stock as fairly valued. Shares are jumping in Aug. 5 trading, which seems appropriate. Despite artificial intelligence fears for software vendors, we think Shopify should be more insulated because only about 20% of revenue is actually from software. Further, early indications are that agentic commerce will help Shopify.

Coming up: The third-quarter outlook is better than our and FactSet consensus estimates. Guidance includes revenue growth in the low 30s year over year, gross profit growth in the mid- to high 20s, and operating expense at 33%-34% of revenue.

Enterprise customers are increasingly adopting Shopify Payments and other commerce components, underscoring the success Shopify has had in attracting larger and more complex users, which we expect to continue over the next year. Gross payment volume processed through Shopify Payments was approximately USD 78.0 billion, or 68% of GMV. Monthly recurring revenue was USD 221 million, up 19% year over year, while we calculate an attach rate of 3.10%, compared with 3.05% a year ago. As Shopify has added more merchant solutions and driven adoption within the installed base, the attach rate has slowly but steadily increased, although gains can be lumpy, especially when the company changes customer gathering programs, as it did in 2024 and 2025. The attach rate was 2.65% five years ago.

Shopify's margin performance this quarter was good, and we see room for further improvement, although we think merchant solutions will serve as a governor that prevents margins from expanding to typical software levels. We are impressed by the balance of growth and margin performance, especially in light of the changes being brought about by AI. In the second quarter, GAAP operating margin was 17.4%, compared with 15.8% a year ago. Stronger revenue, subdued headcount growth, and disciplined spending drove good relative margin performance against our expectations.

We continue to believe that Shopify is well positioned as a leader in e-commerce and has a variety of ways to maintain durable and profitable growth in the coming years. We think the company's platform should help spur demand as legacy systems face challenges in helping customers navigate rapidly changing and complex macro events, such as what we observe today. Shopify should continue to build on success in attracting larger brands to the platform, especially given the rash of recently launched features and products.

Shopify continues to impress us with product breadth and innovation. The company recently released several important AI-focused applications and features, including universal commerce protocol, which it launched in partnership with Google in January and represents a universal end-to-end e-commerce experience for agentic commerce that keeps payments and the back-end infrastructure on Shopify’s platform. Other recent AI solution introductions include Catalog, which provides AI agents access to Shopify's global detailed product catalog, Universal Cart, which allows users to add items from multiple online stores to a single cart for a unified checkout experience, and SideKick. We think these features are driving advancement in the industry and will help attract new users and retain existing users. We also think these elements should preserve Shopify’s back-end technology, which we think would retain the merchant solutions penetration for Shopify merchants, which represent nearly 80% of total revenue for Shopify.

Our fair value estimate is USD 145 per share, which implies an enterprise value/sales multiple of 11 times 2026 revenue and a 2% free cash flow yield.

Our forecast includes a continued shift from subscriptions to merchant solutions. We model a 24% compound annual growth rate for total revenue over the next five years. In our view, revenue growth will be driven by new merchants on the platform, Shopify Payments, Shopify Shipping, Shopify Capital, point of sale, growth in gross merchandise volume, and international expansion. We also assume the introduction of unspecified new merchant solutions over time, such as more financial-related services, although we do not think this is a critical factor over the next several years. We believe that the failure rate will remain high on the SMB side, but also that successful merchants will grow to become Shopify Plus enterprise customers. Our GAAP operating margin estimate expands from 13% in 2025 (actual) to the high teens in 2030.

We assign a Narrow Morningstar Economic Moat Rating to Shopify, primarily driven by switching costs, with the network effect serving as a secondary moat source. We think software and merchant solutions have a narrow moat based on both moat sources. Given the company’s history of generating excess returns, its complete portfolio of software and services, and strong competitive position, we think that Shopify will probably generate returns in excess of its cost of capital over the next 10 years. Given the unknowns surrounding the impact that AI will have on many software companies, we think it is inappropriate to assign a "near certainty" level of confidence to the return profile.

Switching costs for software are often driven by several factors, in our view. The more critical the function and the more touch points across an organization a software vendor has, the higher the switching costs. There is also the direct time and expense of implementing a new software package for the customer while maintaining the existing platform and retraining employees on a new system. Additionally, there is operational risk of changing software vendors, including business process reengineering, loss of data during the changeover, and overall project execution. A major implementation is likely to involve a system integrator and can take in excess of a year in bad cases. Lastly, lost productivity is likely to be an issue as customers move up a learning curve on the new system, along with the distraction of users involved in the function where the change is occurring.

Retention metrics typically help inform investors on both the presence and the durability of a moat. These come in two flavors: gross, which describes what percentage of the customer base remains customers after a given period, and net, which highlights what percentage of the customer spending is retained by the software provider after a given period. Shopify does not provide retention metrics. We think these data points would not look favorable because Shopify primarily serves the small and medium-size business market. On the small end of clients, Shopify might see 75% retention, while according to management, retention is north of 90% for larger Shopify Plus customers.

Shopify provides the core digital commerce engine for customers, including a front end that allows merchants to easily display, manage, and sell products over a variety of channels and an integrated back end that allows users to manage their e-commerce business across those same channels, including sourcing, inventory management, order processing, payments, warehousing, fulfillment, and shipping. We think merchant solutions are inseparable from software in that the software is the core, but the add-on services would not be needed without it. We believe this system is a core pillar of sales execution for customers and should be considered mission-critical. As such, we believe this establishes switching costs as a moat source for Shopify.

Shopify’s diverse client base should be viewed positively, but it complicates our moat analysis somewhat. The failure rate for startups and SMBs is high, typically 25%-75% within the first 10 years, depending on the study. We believe a digital commerce platform is essential for a business-to-consumer model, and small shops would not have an IT support function and therefore would be unlikely to take on the challenge of switching platforms. Again, Shopify offers a turnkey solution that spans both internal operations and customer-facing presentation layers. Critically, Shopify also allows merchants to maintain their own brand when selling in other marketplaces and build a massive data repository on customers. The fact that SMBs have a greater chance of failure does not mean that they would be more likely to change their digital commerce platform. Additionally, the SMB focus ensures a wide funnel for customer gathering.

Larger enterprise users have a more clearly defined switching cost, in our view, given much higher complexity in the overall IT infrastructure and core software systems. Customer relationships tend to be long-tailed here, as is typical in enterprise software, especially for core software elements like e-commerce. Shopify has been moving upstream into this market for years and has solidified its position here as well. Feature additions to the platform, the emergence of commerce components, and a partnership with Manhattan Associates burnish the company’s enterprise credentials.

Merchant solutions are add-on services to the core software package. This set of services is a natural extension of the software and represents a significantly larger portion of revenue than the underlying software. Penetration varies by country and product, but Payments is easily the most popular add-on. We believe these solutions make the solution particularly sticky for SMB customers, as these services are essential for conducting business but are not feasible for SMBs to handle internally.

We view network effect as a secondary moat source across software and merchant solutions. Like some other software companies, Shopify has established an app store, in which developers can sell their Shopify extensions and add-on applications. There are more than 10,000 applications on the platform, which suggests sufficient scale to lend itself to a network effect wherein the large user base attracts developers that make the software better, which in turn attracts more users. The company also has a network of partners referring potential customers to the Shopify platform, with tens of thousands of partners who have referred at least one signed customer to the company. Such referrals tend to generate higher gross merchandise volume and have longer relationships with the company. Taken together, these factors are very important to potential customers as they are evaluating digital commerce platforms.

Shopify’s growth has been strong and is expected to remain so, with robust new merchant adds, increasing GMV, and high attach rates.

We believe Shopify is attractive for SMBs because it is simple to use and has a wide variety of built-in features that make it a turnkey solution.

Shopify has been successful at moving upstream to increasingly attract midmarket and enterprise customers to the platform, which we think has been a worthwhile endeavor.

Shopify has traded at lofty valuations at times, and while it might continue to generate strong growth, the company may still fail to live up to optimistic assumptions embedded in the share price.

Shopify is overexposed to the economic cycle, with the high failure rate for core SMB customers exacerbated by the fact that retail volume would likely decline in a downturn.

As Shopify grows and expands its portfolio, it is increasingly likely that there will be more aggressive competitive responses from major competitors, like Amazon, Salesforce, Adobe, and possibly AI.