Why Shopify Stock Is Skyrocketing Today

Shopify (SHOP 25.97%) stock is surging in Tuesday's trading following the release of the company's third-quarter earnings report. The e-commerce specialist's share price was up 25.6% as of 11 a.m. ET.

Shopify published its Q3 report before the market opened this morning, delivering sales and earnings for the period that beat Wall Street's expectations. Even better, the e-commerce leader's forward guidance came in far better than anticipated.

Today's rally has pushed the stock to a new three-year high.

Shopify posted net income of $344 million on sales of $2.16 billion in the third quarter. The average analyst estimate, as polled by FactSet, had called for net income of $322 million on revenue of $2.09 billion. Revenue was up 26.3% year over year in Q3, and net income roughly doubled.

On a segment basis, merchant solutions and subscription solutions both grew at a 26% annual rate. Meanwhile, the company's free cash flow (FCF) margin improved to 19% in the quarter.

The strong quarterly results were aided by better-than-expected engagement. Gross merchandise volume (GMV), which tracks total spending across online stores using its e-commerce platform, increased 24% year over year to $69.72 billion. For comparison, the average analyst estimate had called for GMV of $67.78 billion. Thanks to improved take rates, overall sales growth in the quarter was even higher.

For the fourth quarter, Shopify is guiding for year-over-year sales growth at a mid-to-high-20s percentage rate. The company also expects that its gross profit for the period will expand at a rate in line with the 24% growth that it posted in Q3. Meanwhile, the company's operating expenses as a percentage of revenue are projected to come in between 32% and 33%.

Management also expects that the business will post a free cash flow margin that is roughly in line with the margin that it posted in last year's quarter. With operating expenses being kept relatively low and the company's FCF margin projected to be roughly the same as last year's, expectations for strong sales growth in Q4 this year have the business poised to deliver a very profitable quarter. Shopify's business is showing increased benefits of scale and also appears to be enjoying momentum from artificial intelligence (AI) features, and investors have become markedly more bullish on the company's outlook.