Damo reaffirms Shopify's (SHOP.US) “gain” rating: in the age of fragmentation, the platform is more valuable

The Zhitong Finance App noticed that after the release of the three-quarter report, Shopify (SHOP.US) stock prices were under pressure due to “not exceeding expectations enough.” However, Morgan Stanley clearly stated in the latest research report: This is not a demand issue, but an expectation issue; investors should “buy back.” The bank reaffirmed the increase rating, and the target price was $192.

Damo's core judgment is to distinguish between “expectations” and “needs.” The three-quarter report reported revenue of about 3.7 billion US dollars, a year-on-year increase of 32%, and gross profit growth of 28%. This may not seem bad, but it is below the buyers' high threshold after the mid-quarter rise. Damo believes that this kind of “disappointment” just shows that the stock price has already been overdrawn too much ahead of schedule, driven by the AI narrative. The real fundamentals have not weakened: the total volume of commodity transactions is about 119 billion US dollars. The growth rate has remained steady at 30% under a constant exchange rate, and the apparent growth rate has slowed from 32% to 29.5%. It is simply a book effect of the exchange rate changing from smooth wind to headwind.

The scarcity of Shopify is that it also has the triple attributes of “durable growth, operating leverage, and ever-expanding AI correlation”, which is rare in the current market. Underpinning this judgment is the breadth of growth: North America's constant exchange rate GMV increased 28% for three consecutive quarters, international growth 32%, European constant exchange rate growth 33%, offline growth 30%, and B2B surged 74%. More importantly, 55% of new offline merchants are new Shopify customers. Judging from this, retail is becoming the platform's independent customer acquisition channel, not just an extension of the existing online business.

There is also evidence of “operating leverage”. The penetration rate of Shopify Payments surpassed 68%, an increase of about 3 percentage points over the previous year; merchant solution revenue increased 35%, outperforming GMV growth, and the overall yield rate rose to 2.44%. On the profit side, gross profit margin of 47.6% remained flat month-on-month in the third quarter, with free cash flow of US$816 million and profit margin of 22%, higher than market expectations of 20%. Damo specifically pointed out that AI assistant Sidekick's conversation volume increased 14% over the previous month, but the single cost decreased by 28% and the total cost decreased by 18%, indicating that AI inference costs did not get out of control with usage. This is the reason why it is optimistic about “AI correlation” rather than seeing it as a burden.

One of Damo's most optimistic logics is “the more fragmented the business, the more valuable Shopify is”. As AI shopping portals are scattered, merchants are more motivated to centralize product catalogs, inventory, checkout, and payments into Shopify, so that companies can share the dividends of AI e-commerce without having to have a final consumer portal. Damo positions it as an “agent-based e-commerce winner regardless of the channel”. The evidence is that AI drainage orders increased 3.3 times year over year, and the conversion rate was 64% higher. About 74% of AI attributed purchases came from outside the platform's top 100 categories, indicating that AI is revitalizing long-tail merchants.

Regarding the flaws in the market's concerns, Damo is also clear: the profit margin on free cash flow in the fourth quarter will be “moderate” than expected, but this is only a “rhythm problem within the year” caused by backward marketing spending, holiday season investment, and rising cash tax burdens. It is expected that operating leverage will reappear in 2027.

In terms of valuation, Damo admits that EV/FCFF is “still expensive” 41 times the 2028 forecast, but after the growth adjustment, it is only 1.6 times, in line with the sector, so it is still attractive. The target price of $192 corresponds to about 35% upside, with a bull market of $293 and a bear market of $90. Damo's final conclusion: an “not shocking enough” financial report will not change its long-term confidence in Shopify as an AI e-commerce winner.