High-growth narrative faces tough tests, causing Shopify (SHOP.US) shares to plunge after earnings! JPMorgan stands firm: Profit growth framework remains intact

According to Zhitong Finance APP, Canadian e-commerce giant Shopify (SHOP.US) saw its stock price fall by 8.74% at Tuesday’s close after releasing its third-quarter results. Although earnings exceeded expectations and holiday season guidance was roughly in line with market estimates, two key metrics that support Shopify’s high valuation—platform transaction volume and gross profit—did not reach the accelerated growth some institutions had bet on, becoming major factors dragging down the stock's performance.

The financial report shows that Shopify’s third-quarter revenue grew 32% year-over-year to $3.742 billion, basically in line with market expectations; adjusted earnings per share were $0.49, better than the expected $0.46. Gross Merchandise Volume (GMV) increased 29.5% year-over-year to $119.145 billion, below the market consensus of $119.9 billion cited by RBC. Gross profit grew 28% year-over-year, missing the latest Morgan Stanley strategist team forecast of around 31%-32%.

The holiday season guidance was also not strong enough to significantly raise profit expectations. Shopify expects fourth-quarter revenue growth to be just over 30% year-over-year, and gross profit growth to be close to but less than 30%. Before the earnings report, Wall Street had forecasted approximately 30% and 28% for the two, respectively. The company expects its free cash flow margin to be roughly flat with the same period last year at around 19%. In other words, the guidance is generally in line with consensus and does not signal a sharp weakening of consumption. According to Morgan Stanley's calculations before the earnings report, Shopify’s price at that time was about 60 times its forecasted 2027 free cash flow, compared to an average of 36 times for large software companies. At such a valuation, there is a difference between “maintaining strong growth” and “growth strong enough to justify a higher valuation.”

However, JP Morgan pointed out in its latest research report that its bullish thesis on Canadian e-commerce giant Shopify (SHOP.US) remains valid through 2027, even as two key areas of controversy still need attention: 1) How will the company sustain 30% revenue growth? 2) Are the current high expense levels only temporary?

JP Morgan noted that on the revenue growth front, Shopify has now achieved 30%+ year-over-year GMV and revenue growth for six consecutive quarters, driven by robust growth across merchants of all sizes, sales channels, and geographic regions. Shopify is still continuously expanding its market share: over the past three years, its compound annual growth rate (CAGR) in the U.S. online sales market reached 23%, far exceeding the overall U.S. e-commerce market growth rate of 8%. Similarly, in Europe, its CAGR over the past three years reached 37%, also higher than the 8% average growth for the broader European e-commerce market.

Since early 2025, Shopify has contributed about 50% of incremental U.S. e-commerce market sales and more than 40% of incremental sales in Europe. By comparison, three years ago the proportion was about 20% in the U.S. and 25% in Europe.

Enterprise-level business execution and transaction volume growth remain strong, though usage levels of various solutions among merchants of different sizes vary, and enterprise business continues to fuel incremental revenue growth. Given strong performances across merchant sizes, customer bases, sales channels, and geographies, JP Morgan remains optimistic that Shopify can continue to achieve 30%+ revenue growth during the "Black Friday through Cyber Monday" (BFCM) shopping season, and does not believe the company is facing macroeconomic headwinds. The bank expects Shopify’s Q4 revenue to grow 33% (34% on a constant currency basis) and fiscal 2027 revenue to grow 29% (29% on constant currency).

On the expense side, Shopify is reducing artificial intelligence (AI)-related costs sequentially through model selection, model distillation, and caching technologies; infrastructure spending will remain elevated through the end of the year; Q4 marketing expenses will sequentially increase, reflecting a shift in spending after incremental effect testing was conducted in Q3, rather than any structural change in marketing philosophy.

More importantly, since 2026, the absolute growth rate of Shopify’s gross profit has consistently outpaced the growth in operating expenses. JP Morgan expects all non-GAAP expense items to show year-over-year expense leverage by 2027.

Apart from fundamentals, Shopify remains a key leader in the agency-driven commerce ecosystem. With over 20 years of accumulated data, the company is well positioned to become the operating system for commerce as a whole. AI integration continues to drive high-conversion traffic to merchants, while Sidekick helps accelerate merchants’ product roadmaps.

JP Morgan highlighted the core points from Shopify’s Q3 earnings call, including:

1. Shopify continues to expand wallet share, with broad-based growth drivers

Shopify has achieved GMV and revenue growth above 30% year-over-year for six consecutive quarters, thanks to strong growth across all merchant sizes, sales channels, and geographies. Consistent with recent quarters, growth has been driven evenly by same-store sales (SSS) and new merchant acquisition.

By merchant size, merchants with annual GMV between $2 million and $25 million contributed the most incremental GMV, while those with over $25 million in annual GMV remained the fastest-growing cohort.

Enterprise-level business execution and transaction ramping remain robust, though adoption of various solutions varies by merchant size; enterprise continues to contribute to incremental revenue growth.

Payment penetration increased about 300 basis points year-over-year, reaching roughly 68%; Shop Pay’s GMV grew 50% year-over-year. Advertising and other solutions also achieved growth.

Subscription Solutions continued to benefit from strong performance in the Standard and Plus plans as well as growth in variable platform fees. This growth was driven both by more merchants exceeding minimum volume thresholds (MVT) and sustained sales growth at larger merchants, providing balanced support from both aspects.

Geographically, driven by localized payment services, Shopify’s European GMV grew 33% year-over-year on a constant currency basis. At the same time, Shopify continues to expand its footprint across Asia and Latin America.

Given strong performance across merchant sizes, customer groups, sales channels, and geographies, JP Morgan remains optimistic about Shopify maintaining over 30% revenue growth during the BFCM shopping season and does not believe the company is facing macro headwinds. The bank expects Q4 revenue to grow 33% (34% on a constant currency basis); 2027 revenue to grow 29% (29% on a constant currency basis).

2. Profitability growth framework remains unchanged

While incremental AI spending around Sidekick continues to add year-over-year pressure to margins, Shopify is delivering sequential cost improvements by adopting model selection, model distillation, and caching. Merchant conversations with Sidekick increased 14% quarter-over-quarter, but cost per conversation fell 28%, cutting total Sidekick costs by 18% sequentially. Infrastructure spending also remains high as Shopify makes advance purchases of computing capacity for BFCM, enhances search functionality, and supports Sidekick.

Beyond infrastructure, Shopify shifted some marketing spend from Q3 to Q4, having previously paused some spending to conduct incremental effect tests. However, Shopify's marketing strategy remains unchanged, continuing its strict discipline and spending thresholds.

More importantly, since 2026, Shopify’s absolute gross profit growth has always exceeded operating expense growth. JP Morgan expects all non-GAAP expense lines to demonstrate year-over-year expense leverage by 2027. The bank forecasts Shopify’s 2027 gross profit will rise 26% year-over-year, with free cash flow margin reaching 20.4%, up 150 basis points year-over-year.

3. Agency-driven commerce continues to bring high-conversion traffic and empower merchants

Currently, merchants are focused on two objectives enabled by Shopify: 1) building the future of agency-driven commerce; 2) driving growth for existing online stores.

Shopify reiterated it remains the operating system for the agency-driven commerce sector, supporting the ecosystem through integrations with partners such as Muse, Instinct, Claude Duet, and Grok Bot. The company is driving product discovery across all major AI channels.

Shopify Catalog is built on over 20 years of commerce data and contains over 1 billion products. Traffic from Catalog converts at roughly twice the rate of typical AI-powered search traffic.

Core agency-driven traffic grew 2.6 times year-over-year while related order volume grew 3.3 times; shoppers driven by AI are about 64% more likely to convert than those from organic search.

Agency commerce continues to expand the total addressable market (TAM). In Q3, about 74% of AI shopping transactions came from product categories outside the top 100.

Daily active merchants on Sidekick grew 3.7 times year-over-year, with daily conversations up 4.2 times; in Q3, Sidekick created about 67% of all workflows (flows).

Sidekick also supports Canvas, helping merchants launch more personalized stores about 20% faster.

Sidekick is helping merchants expand GMV. JP Morgan believes Shopify still has long-term pricing power, but the near-term focus remains on driving merchant growth.

Overall, given Shopify’s leading advantages in AI-driven distribution channels, Shop Pay enablement, Sidekick, Catalog, and the Universal Commerce Protocol (UCP), JP Morgan remains convinced Shopify is well positioned as a leader in the agency-driven commerce sector.

JP Morgan reiterates that Shopify remains its top pick and is included in the JP Morgan Analyst Focus List. The bank expects Shopify's 2027 revenue to grow 29%, gross profit to increase 26% year-over-year, and free cash flow (FCF) margin to reach 20.4%, up 150 basis points year-over-year.

JP Morgan reiterates its “Overweight” rating on Shopify, with a December 2027 price target of $200. This target is based on approximately 23 times 2028 estimated gross profit of $11.1 billion and is further supported by the bank’s discounted cash flow (DCF) model. The bank expects that growth in GMV and revenue, along with continued cost discipline and improved operating efficiency, will drive steady expansions in operating and free cash flow margins.