Shopify: The "tariff sword" remains unresolved, small businesses suffer the most?

On the evening of May 8th Beijing time, before the U.S. market opened, the leading independent e-commerce platform in the U.S., $Shopify (SHOP.US), released its Q1 2025 earnings report. The core issue was that, despite high valuations, the profit growth guidance for the current and next quarters fell below expectations. Key details are as follows:

1. MV Growth Slows as Expected, Tariff Impact Not Yet Visible: The key operational metric—Shopify's GMV for the quarter totaled $74.8 billion, up 22.8% YoY. Although this represents a slowdown of about 2.9 percentage points compared to the previous quarter (after adjusting for currency headwinds, the actual decline was only 1 percentage point), it was largely in line with market expectations, indicating relatively resilient growth.

Considering that the growth rate of overall U.S. online consumption (using non-store retail as a reference) dropped from 9% in Q4 to 4% this quarter, the slowdown in Shopify's GMV growth this quarter primarily reflects weaker macro consumer sentiment, with no tangible negative impact from tariffs yet.

2. MRR Growth Accelerates Against the Trend: The MRR (Monthly Recurring Revenue) metric, reflecting subscription business performance, reached $182 million per month by the end of the quarter, roughly in line with market expectations of $183 million. YoY growth was 20.5%, a 1 percentage point acceleration from the previous quarter, showing an improving trend.

High-frequency data suggests that Shopify's app download growth slowed this quarter, yet MRR growth accelerated. This could be due to a shift in merchant subscription product mix toward higher-tier offerings or adjustments to previously promoted free trial campaigns (e.g., reducing the scope of promotions).

3. Merchant Services Monetization Rate Rises: Revenue-wise, merchant services revenue this quarter was $1.74 billion, up 28.9% YoY, though slowing by 3.7 percentage points sequentially, it still exceeded market expectations by about 2 percentage points. The merchant services monetization rate (merchant services revenue/GMV) rose by 10.9 bps YoY to 2.33%, above the expected 2.29%.

Management noted during the earnings call that payment penetration reached 64% (no decimal places provided), up 3.5 percentage points YoY, with PayPal's payment confirmation method shifting to 1P. Initiatives like Shop Pay and offline POS payments are driving higher payment penetration (reflected in GPV/GMV ratio growth), thereby boosting monetization rates.

4. Subscription Revenue Slightly Misses: Subscription revenue this quarter was $620 million, up 21.3% YoY but slowing by 5.6 percentage points sequentially, slightly below the expected 22%. At first glance, the sequential slowdown in subscription revenue contradicts the slight acceleration in MRR.

However, this discrepancy partly stems from the timing mismatch between MRR (a snapshot at quarter-end) and recognized revenue. Last quarter's MRR growth plunged (from 24% in Q3 to 19.5% in Q4) due to free trial campaigns, foreshadowing this quarter's subscription revenue decline. The modest MRR improvement this quarter suggests subscription revenue growth may rebound slightly next quarter.

5. Gross Margin Drops More Than Expected: Overall, thanks to better-than-expected merchant services monetization, Shopify's total revenue grew 26.8% YoY, 0.9 percentage points above expectations. However, gross margins for both revenue segments declined YoY—an unexpected negative.

Specifically, subscription services gross margin fell ~1.2 percentage points YoY, likely due to free trial campaigns (which caused last quarter's MRR drop). Merchant services gross margin also dipped 1.5 percentage points YoY, slightly worse than the expected 12 bps decline, possibly due to PayPal's shift from 3P (net revenue) to 1P (gross revenue) accounting.

Consequently, Shopify's overall gross margin contracted ~1.4 percentage points YoY, with gross profit growth of just 22.4%, lagging revenue growth and slightly missing expectations.

6. Expenses Slightly Higher but Still in Contraction: Operating expenses this quarter were $970 million, slightly above the expected $960 million, driven by higher marketing and bad debt costs. Bad debt losses surged 47% YoY, possibly reflecting rising consumer defaults amid economic weakness.

Excluding these variances, marketing and R&D expenses grew ~12% YoY, with total operating expenses up just 11% YoY—far below revenue and gross profit growth. Thus, operating expense ratio still narrowed by 5.9 percentage points YoY.

However, due to the gross margin miss, Shopify's free cash flow (FCF) margin improved less than expected, reaching 15.4% (up 1.9 percentage points YoY but below the 15.6% consensus). Despite revenue beating, FCF of $363 million slightly trailed the $365 million expectation.

7. Next Quarter Guidance: Shopify guided for revenue growth in the mid-20s (no significant slowdown from this quarter), above the ~23% consensus, suggesting tariff impacts remain muted. However, gross profit growth guidance of high-teens (below 20%) implies further margin contraction, worse than the expected 21%. Accordingly, FCF margin guidance of ~15% is below the 17% consensus (16.3% YoY), indicating profitability gains may stall or even reverse YoY.

Dolphin Research's View:

In summary, Shopify's quarterly performance had both bright spots and flaws, leaning slightly negative. Positives included resilient GMV growth (already expected) and robust revenue growth driven by payment penetration and monetization. However, gross margin compression—both this quarter and next—weighs on FCF margins, disappointing investors.

While PayPal's accounting change was a known drag, management attributed persistent margin pressure to mix shift toward lower-margin merchant services. Still, back-to-back quarters of worse-than-expected margin erosion hint at potential merchant discounts/fee waivers, especially if macro weakens further.

Looking ahead, neither current results nor guidance show clear tariff or discretionary spending impacts. But Shopify's focus on smaller, independent merchants—with ~50% GMV from tariff-sensitive categories like apparel—makes it highly exposed. Pre-earnings, most banks expected stable near-term growth; the bigger uncertainty is H2 performance.

With macro risks unresolved and shares trading at ~9–10x 2025E revenue (or ~40x 2026E FCF), Shopify isn't cheap. In today's volatile environment, it's hardly a defensive pick.

Full Earnings Breakdown Below:

I. GMV Growth Slows as Expected, Tariff Impact Not Yet Visible

Key metric—Shopify's GMV was $74.8 billion, up 22.8% YoY, slowing ~2.9 percentage points sequentially but matching expectations. As anticipated, tariffs didn't materially affect Q1 performance or consumer behavior.

Given U.S. online consumption growth slowed from ~9% in Q4 to 4%, Shopify's GMV deceleration mainly reflects macro softness, not tariffs.

GPV data remains undisclosed, likely due to ongoing PayPal accounting adjustments (from 3P to 1P). Assuming 64.0% payment penetration (no decimals provided), implied GPV growth was ≥32% YoY.

II. MRR Growth Accelerates, User Mix Upgrading?

MRR reached $182 million/month, nearly matching the $183 million consensus. YoY growth accelerated 1 percentage point to 20.5%, defying slower app download growth. This suggests potential mix shift toward premium subscriptions or scaled-back free trials.

III. Monetization Beats, Revenue Outpaces GMV

Merchant services revenue was $1.74 billion (+28.9% YoY), 2 percentage points above consensus. Monetization rate rose 10.9 bps YoY to 2.33% (vs. 2.29% expected), driving revenue outperformance.

Initiatives like Shop Pay and PayPal's 1P shift likely boosted payment penetration (GPV/GMV), lifting monetization.

Subscription revenue was $620 million (+21.3% YoY), missing by 0.7 percentage points. The sequential slowdown aligns with last quarter's MRR drop (24% → 19.5%), suggesting Q2 subscription growth may rebound.

Overall, revenue grew 26.8% YoY, 0.9 percentage points above consensus.

IV. Dual Margin Compression, Profit Growth Lags

Despite revenue beats, gross margins disappointed: subscription services fell 1.2 percentage points YoY (free trial impact), while merchant services dropped 1.5 percentage points (12 bps worse than expected, partly from PayPal's 1P shift).

Overall gross margin contracted 1.4 percentage points YoY, with gross profit growth of 22.4% lagging revenue.

V. Profitability Improves, But Less Than Expected

Operating expenses were $970 million (40.9% of revenue), at the low end of guidance (41–42%). Bad debt losses surged 47% YoY, but total opex grew just 11% YoY, driving 5.9 percentage points of operating leverage.

However, due to gross margin pressure, FCF margin improved less than expected (15.4% vs. 15.6% consensus), with FCF of $363 million slightly below $365 million expected.