Shopify (TSX: SHOP) reported Q3 2026 operating income of $568 million, up 66% year-over-year, even as investors sent its shares tumbling following weaker-than-expected merchandise volume and subscription revenue.
Shares fell more than 18% in early Tuesday trading following the release, despite net income jumping 75% to $462 million, or $0.36 per diluted share, from $264 million, or $0.20 per share, a year earlier.
Revenue for the quarter ended September 30 rose 32% to $3.74 billion from $2.84 billion, marginally below the $3.75 billion consensus estimate cited by Bloomberg.
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Merchant solutions remained the principal growth driver, generating $2.91 billion, a 35% increase from $2.15 billion last year. Subscription solutions revenue climbed 20% to $836 million from $699 million, missing the $850.2 million analyst estimate reported by Investing.com.
Gross merchandise volume reached $119.15 billion, up 29% from $92.01 billion a year earlier. However, this fell below the approximately $120.08 billion expected by analysts, while growth decelerated from nearly 32% in the preceding quarter.
Monthly recurring revenue increased 19% to $230 million from $193 million.
Gross profit rose 28% to $1.78 billion from $1.39 billion, trailing revenue growth. Gross margin declined to approximately 47.6% from 48.9%, reflecting the increasing contribution of lower-margin merchant solutions.
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According to Shopify’s regulatory filing, merchant solutions typically carry lower margins than subscriptions because of third-party payment processing costs. Merchant solutions represented nearly 78% of quarterly revenue, compared with approximately 75% last year.
Total operating expenses increased 16% to $1.21 billion from $1.05 billion. Research and development spending grew 33% to $497 million, including higher employee-related costs and spending on computer hardware, software, and AI-related usage. Sales and marketing expenses rose 14% to $466 million.
On a non-GAAP basis, net income increased 45% to $638 million, or $0.49 per diluted share, from $441 million, or $0.34 per share, exceeding the approximately $0.47 per-share consensus estimate.
Net cash provided by operating activities increased 59% to $818 million from $513 million. Free cash flow rose 61% to $816 million from $507 million, lifting free cash flow margin to 22% from 18% a year earlier.
The company repurchased $543 million of shares during the quarter, bringing total repurchases for the first nine months of 2026 to $2.48 billion under its $5.0 billion authorization.
Cash, cash equivalents, and marketable securities declined to $4.73 billion at September 30 from $5.78 billion at year-end 2025. Shopify attributed the reduction primarily to share repurchases and financing extended to merchants, partially offset by operating cash generation and net securities maturities.
For Q4 2026, Shopify expects revenue growth in the low-30% range and gross profit growth in the high-20% range. Operating expenses are projected at 29% to 30% of revenue, with stock-based compensation of $155 million.
Management expects free cash flow margin to remain consistent with Q4 2025, when the company recorded a 19% margin.
