Is Shopify Stock a Buy, Sell, or Hold?

Omnichannel commerce platform provider Shopify (SHOP) delivered solid quarterly numbers. For the third quarter (Q3), the company reported strong growth in both revenue and Gross Merchandise Volume (GMV), surpassing Wall Street’s expectations. Adding to the optimism, Shopify provided upbeat guidance for the fourth quarter, forecasting higher-than-anticipated revenue.

The market responded enthusiastically, sending Shopify shares soaring over 21% on Nov. 12. However, after the stock's 81.9% return in the past six months, is Shopify stock still a buy, or has the recent rally left little room for additional upside?

www.barchart.comQ3 Highlights: Consistent Growth Across Key Metrics

Shopify delivered another quarter of solid growth, reporting $2.16 billion in revenue, a 26% increase year-over-year, surpassing the $2.1 billion consensus estimate. This marks the sixth consecutive quarter of revenue growth above 25% (excluding logistics).

The company’s Gross Merchandise Volume (GMV)—a key metric of commerce activity and revenue driver—rose 24% from the prior year to $61 billion, beating Street estimates. GMV has now marked five straight quarters of over 20% growth.

Other highlights include:

Merchant Solutions revenue was up 26% year-over-year, supported by increased adoption of Shopify Payments, which processed $43 billion in GMV (+31% YoY).Monthly Recurring Revenue (MRR) grew 28% YoY to $175 million, driven by new merchant growth across its Standard, Plus, and Point of Sale offerings.Subscription Solutions Revenue increased 26%, driven by increased merchant subscriptions and pricing adjustments for Shopify Plus.

Moreover, Shopify's free cash flow in Q3 stood at $421 million, translating to a 19% margin from 16% a year ago. The company’s focus on operational efficiency and lower expenses contributed to this improvement.

Shopify’s Growth Engine: Key Catalysts for Future Expansion

Shopify is well-positioned to maintain its impressive growth trajectory, supported by multiple growth drivers. The company’s GMV is expected to rise, driven by increased same-store sales from existing merchants, mainly Shopify Plus clients, a growing merchant base, and robust international expansion.

Further, Shopify's global growth story is particularly compelling. In Q3, the company's GMV outside North America surged 33%. European markets, including the UK, Germany, France, and the Netherlands, saw even stronger performance, with GMV growth exceeding 35%. Meanwhile, Shopify’s offline Point of Sale (POS) business also delivered solid results, achieving 27% year-over-year GMV growth.

Besides benefiting from higher GMV, Shopify’s top line will likely be driven by solid Subscription Solutions revenue growth, driven by an expanding merchant base and enhanced by changes to its paid trials and Plus pricing. Additionally, Shopify's payments ecosystem continues to deepen. Payments penetration hit an impressive 62% in Q3, reflecting the increasing adoption of Shopify Payments and Shop Pay. Notably, Shop Pay accounted for 40% of Shopify’s Gross Payments Volume (GPV) in the quarter, highlighting its growing significance.

To support its growth initiatives, Shopify is ramping up its marketing spend. The company continues to invest in performance marketing, increasing payouts to affiliate partners, and bolstering its enterprise and POS businesses. Shopify's investments are expected to drive long-term growth by enhancing its visibility and capabilities across online and offline commerce channels.

Q4 Outlook: Strong Holiday Tailwinds

Shopify expects its traditionally strong fourth quarter to benefit from the holiday shopping season. Management forecasts revenue growth in the mid-to-high 20% range, comfortably ahead of the consensus estimate of 23%.

On the free cash flow front, Shopify expects its Q4 free cash flow margin to be 21%, which is in line with the prior year's quarter. This would mark a continuation of its solid financial performance throughout 2024, with each quarter showing sequential improvements in free cash flow margin and absolute free cash flow dollars.

The transformation in Shopify’s cash flow profile is striking. In 2022, the company posted a negative 3% FCF margin. Fast forward to 2023, and Shopify delivered a 13% margin, with 2024 now on track to achieve FCF margins in the high teens. This turnaround underscores Shopify’s ability to scale profitably while reinvesting in growth initiatives.

The Bottom Line: Buy, Sell, or Hold?

Shopify is a dominant player in the omnichannel commerce space, consistently delivering strong growth and expanding its market share. Its platform supports digital commerce for businesses worldwide, positioning it well to capitalize on the omnichannel shift.

However, the recent stock rally priced in much of the near-term optimism. While Wall Street analysts rate Shopify as a "Moderate Buy," their average price target is below its current levels. That said, given its solid quarterly performance, analysts may revise their targets higher.

www.barchart.com

For long-term investors, Shopify remains a compelling "Hold," thanks to its solid fundamentals and growth potential. As for short-term investors, after the recent surge, consider waiting for a better entry point if you're looking to buy.

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On the date of publication, Amit Singh did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.