Shopify’s performance is indeed impeccable.
The leading small-cap AI e-commerce player in Europe and the US — $Shopify (SHOP.US) released its 2026 Q2 earnings report on the evening of August 5 US time, and its pre-market share price once rallied nearly 30%. With such a staggering surge, how strong is this quarter’s performance exactly?
Overall, whether it is the revenue and profit growth in the current quarter, or the guidance for the next quarter, all are indeed fully better than expectations. Regardless of whether such a rally is reasonable, Shopify’s performance is truly impeccable, as detailed below:
1. Theot of the matter, the core reason behind this strong performance boils down to one point only — the actual GMV grew 31.6% year-on-year, far exceeding the sell-side expectation of about 27.6%. Even the more optimistic buy-side expectation was only around 29%~30%, which makes this a real outperformance against expectations
In terms of trend, at first glance, the quarter-on-quarter growth rate this quarter has slowed down considerably, but actually after excluding the exchange rate impact, the real GMV growth rate remained at 30%, roughly equivalent to that of the previous several quarters. However, Shopify’s GMV growth rate suddenly accelerated to 30% or above starting from Q2 last year.
In other words, the expectation gap comes from the fact that the market believed Shopify’s growth rate would “return to the mean” and decline after maintaining a high growth of about 30% for a full year, but the reality is that it continues to “surge” against a high base.
According to the company’s disclosure, previous growth was mainly driven by overseas businesses (mainly in Europe), but in the past two quarters, overseas growth has begun to decline significantly, and the re-acceleration of North American growth has taken over to maintain the overall continued high GMV growth.
According to the qualitative statement in the earnings call, the growth of average sales of existing merchants, as well as large enterprise users with annual sales exceeding $25 million, are the main driving forces for growth.
2. Double amplification effect of payment penetration and monetization rate: On the basis of strong GMV growth, the penetration rate of Shopify’s payment amount in GMV continued to rise, increasing by about 1pct quarter-on-quarter, driving payment amount to grow by about 37% — this is the first layer of amplification.
The second layer of amplification comes from the improvement of the monetization rate of merchant service revenue, which reached 2.41% (proportion in GMV) this quarter, rising by more than 10bps year-on-year, the highest in the recent three quarters. According to the earnings call explanation, the higher monetization rate is mainly driven by the increase in partner share and the positive performance of financial businesses (such as operating loans).
Under these two rounds of amplification, merchant service revenue increased by more than 37% year-on-year, significantly beating the market expectation by about 4.5pct.
3. MRR growth continues to recover: In contrast, the subscription business did not perform that brilliantly, but it is also improving. The core indicator — MRR (Monthly Recurring Revenue) was $221 million this quarter, growing 19.5% year-on-year, nearly 1pct higher than the market expectation.
In terms of trend, with the fading impact of the previous “free/discount” trial period (Q2 last year was exactly the lowest point of growth), MRR growth continues to return to normal. Corresponding subscription revenue grew by 22%, slightly exceeding the market expected growth rate by about 1.5pct.
4. Gross margin just meets expectations: Compared with the strong growth side, the overall overall gross margin this quarter was 47.7%, which just met the sell-side expectation, and the trend contracted by about 0.9pct year-on-year, which is not a good performance.
Due to the increase in payment penetration rate and comprehensive monetization rate, the gross margin of merchant service revenue is better than expected, rising slightly by about 0.5pct year-on-year, about 75bps higher than the sell-side expectation.
Overall, due to the larger decline in gross margin of subscription revenue, and the rising proportion of low-gross-margin merchant service revenue in the revenue structure, the resonance of these two factors led to the overall gross margin remaining weak, with gross profit growing by about 31% year-on-year, lower than the revenue growth rate.
5. Expenses meet expectations: From the expense perspective, the total expenditure this quarter was about $1.22 billion, completely consistent with the sell-side expectation, and there is also no outperforming performance beyond expectations.
However, in terms of trend, total expenses only increased by 20.5% year-on-year, significantly lower than the growth rate of revenue and gross profit (the expense ratio was diluted by higher revenue growth), which in turn translates to the release of profit margin.
Specifically, marketing expenditure growth is close to the overall level at around 20%, R&D and administrative expenses grew less, both just over 10%, but the still high transaction loss expense is the main drag, which increased significantly by 76% year-on-year this quarter. With the growth of the company’s business (especially financial business), the company’s bad debt losses have grown rapidly for two consecutive years. Fortunately, the absolute expenditure is still just over $100 million, and the overall impact remains limited. According to the company’s previous explanation, 3/4 of the new bad debt expenditure comes from loan losses, and 1/4 is caused by the growth of payment amount.
6. Profit leverage continues to release: As can be seen from the above, neither the gross profit side nor the expense side performed exceptionally well this quarter, and all outperformance against expectations comes from strong GMV and revenue growth. However, due to the amplification effect of the base (an extra $100 million has little impact on revenue, but when transmitted to profit, it may lead to a 10% outperformance against expectations), the main profit indicator the company focuses on — free cash flow margin reached about 18% this quarter, a significant increase from 15.7% in the same period last year, driving cash flow profit to surge 55% year-on-year, far exceeding the market expected growth rate of 30%.
Finally, in terms of both growth and profit, this quarter’s performance achieved strong growth and significantly beat expectations.
1. Both current quarter performance and next quarter guidance are flawless
To sum up Shopify’s performance this quarter, although there is no outstanding outperformance beyond expectations in terms of gross profit and expenses, under the “spotlight” of overwhelming strong GMV growth, any flaws have been covered up. The revenue growth rate of over 30% and profit growth rate of over 50% are enough to make anyone who questions Shopify’s investment value and logic admit that Shopify’s performance is indeed unarguably excellent.
On this basis, the company’s strong guidance for Q3 further reinforces the above view. Specifically, it guides the next quarter’s revenue growth to be in the low 30%+ range, while the market expectation is less than 27%. In other words, Shopify’s growth will not see a significant slowdown in the next quarter.
The guided free cash flow margin for the next quarter is 16%~20%+ (most likely to exceed 20%) , continuing to rise from 18% in the current quarter, and the sell-side’s expectation for next quarter’s FCF margin is also 18%.
Gross profit is expected to grow at a medium-to-high 20% rate year-on-year, a decline compared with the 30% growth rate this quarter, indicating the gross margin pressure in the next quarter will be more obvious (the reason for the pressure should be the same as this quarter, only more severe).
However, since the expense expenditure for the next quarter is expected to only account for 33%~34% of revenue, far lower than the 37% in the same period last year, it is the stronger expense leverage that allows cash profit to continue to rise in the next quarter even when gross margin is under pressure.
Overall, the company’s performance in the next quarter will still maintain the optimal double-click trend of high revenue growth and rising profit margin.
2. Investment Logic & Recent Developments – The Reversal of AI Narrative
It is undeniable that despite the strong performance, Shopify’s logical narrative was not good before. Although the share price has rebounded well from the low point (up 20+%), it has still fallen by more than 30% from the high point at the end of last year, which is the evidence. The change in the underlying investment logic was pointed out by Dolphin Research in the last quarter’s earnings report — as the main development and monetization direction of AI shifts from 2C to 2B businesses such as Coding and Workflow automation, the enthusiasm of capital for AI 2C applications such as Agentic Commerce has completely faded, and the progress in actual business is also not smooth.
a. According to recent surveys, the effect of LLM Agent diverting traffic to e-commerce is “limited in results” from both the absolute proportion and the improvement speed, and Shopify’s performance has fallen behind compared with its competitors. According to SimilarWeb, currently the highest proportion of traffic directly brought by LLM models on the web side is only 0.7%, while Shopify’s share is less than 0.3%, and there has been basically no improvement in the past three months.
Therefore, the performance imagination space brought by Agentic Commerce has now basically collapsed.
b. Shopify’s AI input-output ratio debate: Following the same logic, after the focus of AI development shifts to the enterprise side to reduce costs and improve efficiency, Shopify has recently begun to focus on promoting its Sidekick service – an AI Agent for merchants, which can help complete various tasks such as analyzing business data, modifying online store pages, and generating graphics and texts.
The main market controversy over this is – Sidekick is currently provided for free to all subscribed merchants (different subscription tiers have different Token limits). In other words, this service basically cannot bring any incremental revenue to the company, but as merchants’ usage increases, it will generate more and more computing power usage costs, making its ROI very difficult to justify.
At present, foreign banks’ preliminary estimates of the incremental expense expenditure brought by this measure are about tens of millions of dollars per year, the drag on the gross margin of the subscription business is about 1~2%, and the degree of drag on the company’s overall profit is roughly the same.
This has been reflected in this quarter’s performance, and the impact appears to be more serious than previously estimated by outsiders.
3. Attack and defense around “traffic sources”
c. Meta’s potential competitive threat: Another event that has suppressed the company recently is that Meta has increased its attempts in e-commerce business since June, and launched the Meta Business Agent Platform for merchants. Its functions include two aspects — on the user side, users are allowed to discover merchants and their products in apps such as WhatsApp and Instagram; on the merchant side, the Agent can help automatically reply to customers, automatically generate briefings, etc.
Although Meta’s current attempt is still mainly limited to customer management and acquisition, and does not involve other core functions provided by Shopify — such as online store construction and management and online payment, etc., the direct impact on Shopify in the short term should be limited.
However, for long-only long-term capital, the concern is that Meta (including Google and others) may gradually expand its e-commerce attempts from the current user acquisition and management to other core functions such as store construction, order management, and payment, directly competing with Shopify.
Dolphin Research believes that it is unlikely that Meta will enter the niche vertical market of “online store construction”, but the real problem here is that Shopify’s e-commerce ecosystem lacks the arguably most important functional sector of “traffic acquisition”, and most merchants do need to acquire new users from traffic platforms such as Meta and Google. Therefore, (although the possibility is not high) if Google, Meta and others decide to compete head-on with Shopify, it is very likely to be a dimensionality reduction strike.
d. Shopify Campaigns: Perhaps precisely to cope with competition and the core disadvantage of “lacking own traffic”, Shopify “coincidentally” focused on promoting its advertising business recently.
Specifically, this business takes the Shop App (an independent app, previously mainly used for order tracking and other functions) as the main traffic field; it mainly attracts users by providing targeted discounts to drive transactions; and charges fees only after the transaction is completed.
According to recent surveys, the progress of this business is still in the absolute early stage. After all, the natural traffic of the Shop App entry is limited, which is not comparable to traditional traffic platforms such as Facebook, Google, and TikTok. Therefore, Campaigns currently has a limited role in reaching new users, and can only mostly activate existing Shopify users and increase order frequency.
Overall, although in the short and medium term it is hard to say whether the company can successfully transform into a closed-loop e-commerce platform with the Shop App as the entry, in terms of general logic, this is indeed a correct strategic choice. Compensating for the missing traffic entry capability can reduce its dependence on external traffic (mitigating the aforementioned threat that Meta may compete head-on with the company).
At the same time, it also solves the problem that the company can only rely mainly on payment for monetization in the most profitable e-commerce format. Once advertising monetization is successfully established, its revenue and profit space will very likely be several times larger than Shopify’s current scale.
