Shopify: When Explosive Growth Masks All Other Issues

Shopify: When Explosive Growth Masks All Other Issues

U.S. independent e-commerce leader Shopify (SHOP.US) announced its Q2 2025 financial results after market close on August 6th. Driven by robust Gross Merchandise Volume (GMV), most indicators significantly exceeded expectations, and the guidance for the next quarter was also notably higher than anticipated. This combined positive momentum led to a surge in its stock price after the earnings release. Here's a detailed look:

1. Strong GMV Growth, The Source of All Outperformance: The most crucial operational metric and the primary reason for this quarter's significant earnings beat was the nearly 31% year-over-year surge in GMV within the Shopify ecosystem. This marks a substantial acceleration from the previous quarter's 23% growth and far exceeded market expectations for a flat sequential growth.

Even accounting for the nominal growth benefiting from foreign exchange tailwinds (reversing headwinds), GMV growth under constant currency also accelerated by 4 percentage points compared to the last quarter. Sell-side previews observed by Dolphin Research made no mention of such strong GMV growth signals, thus management's explanation for this robust GMV during the earnings call requires close attention.

2. Merchant Solutions Monetization Rate Rises as Expected: Driven by strong GMV growth, Merchant Solutions revenue also saw a significant year-over-year increase of nearly 37%, a substantial acceleration from the previous quarter. However, this quarter's merchant solutions monetization rate was only within expectations (though still up about 11 basis points year-over-year), meaning the outperformance in merchant solutions revenue did not further amplify the overall beat.

(Payment volume data is no longer disclosed in the earnings report; this metric also requires attention during the earnings call.)

3. MRR "Within Expectations" but Below Forecasts: The leading indicator for the subscription business, Monthly Recurring Revenue (MRR), stood at $185 million this quarter, growing by only 9.5% year-over-year, noticeably lower than the anticipated $192 million. However, prior to the earnings release, some Wall Street firms had already noted that current market expectations overestimated actual MRR due to the company's free trial initiative, which can last up to six months.

Correspondingly, Subscription Solutions revenue increased by approximately 17% year-over-year this quarter, a clear slowdown from the typical 20%+ growth seen in previous quarters, and slightly below market expectations.

4. Gross Margin Decline Greater Than Expected: In terms of gross profit, this quarter's gross margin narrowed by 2.5 percentage points year-over-year, which was also about 50 basis points lower than market expectations. Specifically, on one hand, both Subscription Solutions and Merchant Solutions gross margins narrowed by 1.2 percentage points year-over-year due to the free trial activities and a change in PayPal business accounting (from net revenue recognition to gross revenue).

On the other hand, the faster growth of the lower-margin Merchant Solutions business relative to the Subscription Solutions business led to a structural increase in the proportion of lower-margin operations, thereby dragging down the overall gross margin.

Despite the narrower-than-expected gross margin, gross profit still increased by 25% year-over-year, a noticeable deceleration compared to revenue growth. However, due to the substantial revenue beat, the final gross profit was still about 4% higher than anticipated.

5. Expenses Increase Significantly, As Expected: Regarding expenses, total operating expenses this quarter were approximately $1.11 billion, largely in line with market expectations. However, in terms of trend, compared to the past few quarters where expenses either declined or only slightly increased, this quarter saw a significant year-over-year increase of nearly 26% in expenses, suggesting that Shopify may be re-entering a period of increased investment and expansion.

Specifically, the largest increase this quarter was in general and administrative expenses, while share-based compensation expenses did not significantly increase. Based on this, Dolphin Research speculates that the company might have substantially increased investments in top talent or office spaces.

6. Profitability No Surprise, But Profit Amount Still Beats Expectations: Although there were no standout points regarding costs and expenses this quarter, driven by the significantly better-than-expected revenue, both the final gross profit amount and cash flow were better than anticipated. The actual free cash flow margin was 15.7%, narrowing by approximately 0.6 percentage points year-over-year. However, the free cash flow amount of $420 million was still significantly higher than the expected $390 million.

7. Not Only Strong Current Performance, But Also Excellent Next Quarter Guidance: For the next quarter, revenue growth is guided to be 26%~29%, higher than the 22% expectation, though a slight slowdown from this quarter. Gross profit growth is guided at 20%~25%, higher than the 18% expectation, implying that gross margin will continue to decline but at a narrower rate.

Operating expenses as a percentage of revenue are guided at 38%~39%, an expansion from this quarter and higher than the market's 37% expectation. This suggests that the company's investment intensity will further increase next quarter, which will weigh on profits. Consequently, the free cash flow (FCF) margin is guided at 16%~19%, largely in line with market expectations, and will continue to narrow year-over-year.

Dolphin Research Viewpoint:

In summary, Shopify's performance this quarter was undoubtedly impressive. However, as analyzed above, the outperformance this quarter was almost entirely driven by the exceptionally strong GMV growth.

In other aspects: 1) The proportion of merchant solutions revenue to GMV (which can be understood as the monetization rate) continued to increase year-over-year, which is commendable, but it did not exceed expectations and even narrowed sequentially; 2) The subscription business slightly underperformed expectations due to trial activities; 3) Gross margin and free cash flow margin both narrowed (within expectations) due to changes in revenue structure and increased investments.

However, all these imperfections were "eclipsed" by the significantly better-than-expected revenue, and the final values of all metrics were still generally well above expectations. The guidance for the next quarter is similar: despite an exceptional revenue outlook, gross margin will continue to narrow, and the expense ratio will further expand. Yet, the final gross profit and cash flow values are also projected to be better than expected.

In other words, as long as there is strong business growth, other issues are not really issues. So, what are the underlying drivers behind this extremely strong GMV growth, which almost no one in the market anticipated?

According to the company's earnings call, offline GMV growth of 29% actually lagged the overall growth, while B2B business continued its triple-digit growth (though its base is likely small, with limited absolute impact). The primary contributor was strong growth in international business, up 42% year-over-year; GMV growth in the United States also showed signs of acceleration.

Therefore, it can be understood that Shopify's rapid expansion into new overseas markets and its sustained rapid increase in market share within the U.S. market are the fundamental drivers behind its exceptional business growth.

Looking ahead at future performance trends, combined with the company's guidance, subsequent GMV and revenue growth still show a positive trend. While it's difficult to predict whether this acceleration will continue, after this earnings report, the center of revenue growth appears to have stepped up from the low-twenties to the mid-to-high twenties.

However, correspondingly, due to the strengthening growth momentum and the company's investments in features like AI, profit performance in the short-to-medium term might not be as strong as revenue. Yet, from a long-term perspective, investments made for growth are rarely a bad thing.

Beyond the earnings, Shopify's recent performance has also been driven by narrative-based tailwinds such as AI and Stablecoins. On one hand, the company recently announced support for direct purchases with USDC within Shopify Payments, capitalizing on the hot topic following the stablecoin legislation release.

On the other hand, Shopify is also considered one of the biggest beneficiaries in the FinTech sector. Through its partnership with OpenAI, merchants can directly call OpenAI's API for assistance when building stores and listing products. It has also partnered with Perplexity, allowing its users to see products within the Shopify ecosystem and make one-click purchases when searching for product information.

From a valuation perspective, due to the recent significant stock price increase, the company's market capitalization before earnings corresponded to an approximate 66x multiple of the market's expected 2026 FCF, and still around 45x for 2027 FCF. Based on P/S (Price-to-Sales) valuation, it was slightly above 12x for 2026. This is typical for a SaaS company with a valuation that is difficult to justify with mid-term earnings.

Therefore, it's challenging to determine whether the company is expensive or cheap from a value perspective; investment is more likely to be trend-based, focusing on the improvement or weakening of the company's mid-to-short term performance trends, especially the most crucial metric: GMV growth.

Below are the core charts and supplementary comments:

I. Strong GMV Growth

This quarter, GMV within the Shopify ecosystem reached $8.78 billion, a significant year-over-year increase of 30.7%, showing clear acceleration and substantially exceeding expectations. According to disclosures during the conference call, Gross Payment Volume (GPV) accounted for approximately 64% of GMV, largely consistent with Q4 2024, without a significant increase. In other words, GPV generally grew in line with GMV.

II. MRR "Within Expectations" but Below Forecasts

This quarter, Monthly Recurring Revenue (MRR) was $185 million, growing by only 9.5% year-over-year, noticeably lower than the anticipated $192 million. This was primarily due to the company's free trial offer, which can last up to six months.

Additionally, high-frequency data shows that Shopify App downloads declined by 9% sequentially this quarter, the largest drop since Q2 2023. This suggests a decrease in the number of new merchants, which could also be a contributing factor to the slowdown in subscription revenue growth.

III. Monetization Rate Increases, But Not Beyond Expectations

At the revenue level, Merchant Solutions revenue this quarter was $2.02 billion, a significant year-over-year increase of 36.6%, accelerating substantially from the previous quarter. The service monetization rate, calculated as Merchant Solutions revenue/GMV, increased by 10.6 basis points year-over-year to 2.31% (partially due to the change in PayPal revenue accounting). However, from another perspective, the monetization rate sequentially declined and was lower than expected, thus the revenue outperformance did not expand beyond the GMV performance.

Due to the weak MRR performance, Subscription Solutions revenue increased by approximately 17% year-over-year this quarter, a clear slowdown from the typical 20%+ growth seen in previous quarters, and slightly below market expectations.

IV. Gross Margin Under Pressure and Declining, But Profit Amount Still Beats Expectations

Due to the respective impacts of free trial activities in the Subscription Solutions business and the change in PayPal business accounting (from net revenue recognition to gross revenue) in payment income, gross margins for both Subscription Solutions and Merchant Solutions businesses narrowed by 1.2 percentage points year-over-year.

Structurally, the proportion of lower-margin Merchant Solutions revenue continued to increase. Overall gross margin this quarter was 48.6%, narrowing by 2.5 percentage points year-over-year. However, due to the substantial revenue beat, the final gross profit amount was $1.32 billion, still growing by nearly 25% year-over-year, and also about 4% higher than expectations.

V. Re-entering an Expense Expansion Cycle?

Total operating expenses this quarter were approximately $1.11 billion, largely in line with market expectations. However, in terms of trend, compared to the past few quarters where expenses either declined or only slightly increased, this quarter saw a significant year-over-year increase of nearly 26% in expenses, suggesting that Shopify may be re-entering a period of increased investment and expansion.

Specifically, general and administrative expenses saw the largest growth, doubling year-over-year (partially due to a very low base last year), though sequential growth was less dramatic. Additionally, marketing expenses also increased by nearly 18% year-over-year, marking the highest single-quarter growth since Q1 2024.

Due to the narrower gross margin and expanded expense ratio, this quarter's free cash flow margin was 15.7%, narrowing by approximately 0.6 percentage points year-over-year. However, as revenue significantly exceeded expectations, the final free cash flow amount of $420 million was still notably higher than the anticipated $390 million.