Shopify's (SHOP.US) free cash flow surged 61%, but plummeted 20% before the market! Following Intel's sharp decline, technology stock earnings are once again met with harsh expectations

The Zhitong Finance App learned that after Canadian-based e-commerce giant Shopify Inc. (SHOP.US) recently released its performance report, the company's stock price fell sharply by about 20% from the previous closing of $156.22 in pre-market trading of US stocks. US CPU and chip manufacturing giant Intel (INTC.US), whose stock price dropped the harshest in 40 years after announcing results last week, and Shopify can be described as the common denominator. Earnings for the quarter exceeded expectations, but stock prices were all sold off. The key difference is that Intel closed down about 28.6% due to lower than expectations in forward-looking profit guidance, and Shopify's holiday season guidelines were generally in line with market expectations.

For Shopify, the more explanation is that transaction volume increased by about 29.5% and gross profit increased by 28% in the third quarter, none of which reached the 33% and 31% — 32% forecast before Morgan Stanley's earnings report. Therefore, even a 61% increase in free cash flow would not be enough to dispel the market's doubts about valuation. The investment value of the company's partnership with Meta Muse, an AI agent popular around the world, and the catalyst for basic scenarios ultimately depends on how many orders it can create for merchants that would never have occurred and how much gross profit these orders can leave for Shopify.

Judging from the comparison between financial reports and market expectations, the best explanation for the decline is that profit exceeded expectations, but the two indicators supporting overvaluation — platform transaction volume and gross profit — did not reach the growth rate that some institutions are betting on. Revenue for the third quarter was US$3.742 billion, up 32% year over year, basically in line with market expectations of US$3.74 billion; adjusted earnings per share rose from US$0.34 to US$0.49, higher than the forecast of US$0.46. The total commodity transaction volume (GMV) was only US$119.145 billion, slightly lower than the market consensus of US$119.9 billion quoted by the Royal Bank of Canada (RBC); its year-on-year growth rate of about 29.5% was also lower than the 33% forecast before Morgan Stanley's earnings report. Gross profit increased by 28%, also falling short of the range of about 31% to 32% of the latest expectations of the Morgan Stanley strategist team.

The holiday season guidelines are also insufficient to drive profit expectations to improve significantly. Shopify expects revenue growth of around 30% year-on-year in the fourth quarter, with gross profit increasing close to 30% but less than 30%; before the earnings report, Wall Street predicted about 30% and 28% for the two, respectively. The company expects free cash flow to be about 19% in the same period last year. In other words, the guidelines were generally in line with the consensus and did not predict a sharp decline in consumption; however, according to estimates before Damo's earnings report, Shopify's stock price at the time was about 60 times the expected free cash flow in 2027, while the average value of large software companies was about 36 times. Under such a valuation, “maintaining strong growth” and “growing strong enough to raise the valuation” are two different thresholds.

For every $100 traded, $68 is paid at home: gross margin has declined, so why is cash flow increasing?

Shopify's operating base is still expanding. Subscription solution revenue for the third quarter was US$836 million, up 20% year over year; monthly recurring revenue (MRR) at the end of the period rose from US$193 million to US$230 million, an increase of approximately 19%. Faster growth comes from revenue generated from merchant transactions: merchant solutions revenue reached $2,906 billion, up 35% year over year, accounting for approximately 78% of total revenue.

Among them, the latest financial data shows that Shopify's own online payment and digital wallet trading platform, Shopify Payments, processed 81.4 billion US dollars of transactions, an increase of 35% over the previous year; the payment penetration rate increased from 65% to 68%. This means that Shopify not only benefits from merchants selling more products, but also undertakes a larger share of payments in the same batch of transactions.

The growth in the payment business also brought more payment processing costs; infrastructure costs such as cloud hosting, basic software, and large-scale model calls for subscription services increased by 40 million US dollars over the same period last year. Although the Group's gross profit rose to US$1,781 billion, gross margin fell from 48.9% to 47.6%. However, operating expenses only increased by about 16%, which was significantly slower than gross profit. As a result, operating profit rose from 343 million to 568 million US dollars, an increase of 66%; operating profit margin increased from 12.1% to 15.2%.

According to US accounting standards, net profit increased from 264 million to 462 million US dollars; free cash flow increased from 507 million to 816 million US dollars, an increase of 61%, and free cash flow increased from 18% to 22%. The most valuable distinguishing data from this financial report is that gross profit per dollar of revenue was slightly reduced, but cost growth was controlled, and in the end, more operating profit and cash were left behind.

Muse is responsible for discovery, and Shopify is responsible for transactions: How can smart shopping become actual revenue?

The collaboration between Shopify and Meta integrates the product catalog and Shop Pay checkout into Muse: consumers can discover products during conversations, pay directly after authorization, and bank card information will not be handed over to the smart device. Merchants are still responsible for contract fulfillment and after-sales. Direct checkout within the Meta channel does not charge additional channel fees; only regular payment processing fees apply.

Analysts from Deutsche Bank believe that the importance of this collaboration is that leading AI platforms are connecting to Shopify's transaction infrastructure; even if the starting point of shopping shifts from merchant websites to smart devices, Shopify still has the opportunity to accept orders and payments, and there is no need to win the competition for which AI app consumers use first.

Early data has shown that consumers are willing to shop this way. Meta revealed on an October conference call that in about six weeks since Muse was launched, more than 10 million people in the US and Canada have completed the setup; more than a quarter of users use it to shop, and the average single purchase amount exceeds $200, including travel expenses. The third-quarter data disclosed by Shopify itself is closer to issues related to AI intelligence that investors are increasingly focusing on recently: the traffic imported by AI to merchant stores reached 2.6 times that of the same period last year, orders originating from AI search reached 3.3 times, and the conversion rate of AI referred visits was 64% higher than organic searches. The first set is Muse full-platform data, and the latter group covers Shopify's multiple AI channels; the company did not list GMVs contributed by Muse alone.

What is most worth tracking in the future is whether the proxy AI shopping workflow led by AI agents can bring in new customer orders that would not otherwise be completed, and whether the gross payment margin contributed by these orders can cover the cost of additional technology — these factors together determine whether Muse changed a checkout portal or expanded the business for Shopify.