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# Shopify Inc. (SHOP) - Business, Risks and Management's Discussion Shopify reports in US dollars, and all amounts below are as the company reports them. The business, risk and annual results sections come from the Form 10-K for the fiscal year ended December 31, 2025 (filed February 11, 2026, accession 0001594805-26-000007). The current-quarter and subsequent-events sections come from the Form 10-Q for the quarter ended June 30, 2026 (filed August 5, 2026, accession 0001594805-26-000047), plus the 8-K filings cited where they are used. ## Business *Source: Form 10-K for fiscal 2025, accession 0001594805-26-000007.* Shopify sells a commerce platform that merchants use to run their businesses across online storefronts, physical stores, social media and, increasingly, AI platforms. Its customers range from first-time entrepreneurs to large direct-to-consumer and business-to-business brands such as Aldo, SKIMS, Supreme and Meta. Revenue comes from two sources. **Subscription solutions** ($2,752 million in 2025, 24% of revenue) are the monthly or annual platform fees, plus app, theme and domain sales. **Merchant solutions** ($8,804 million, 76%) are fees that scale with merchants' sales: mainly payment-processing and currency-conversion fees from Shopify Payments, plus lending, partner referral fees, shipping labels, point-of-sale hardware and advertising. Total 2025 revenue was $11,556 million on $378.4 billion of gross merchandise volume (GMV) processed through the platform. GMV is not revenue: it is the value of orders merchants sell. **Merchants and plans.** As of December 31, 2025, millions of merchants in more than 175 countries used the platform: 44% in the United States, 31% in Europe, the Middle East and Africa, 16% in Asia Pacific, 5% in Canada and 5% in Latin America. No single merchant has ever accounted for more than 5% of revenue in any reporting period. Most merchants subscribe to the entry-level Basic and Grow plans. However, most GMV comes from merchants on Shopify Plus and enterprise offerings, which are priced at several times the standard plans and carry annual or multi-year terms. Standard plans typically run month to month. The company tracks Monthly Recurring Revenue (MRR, $205 million at year-end 2025) as its best gauge of the long-term value of its subscription base. It says older merchant cohorts have historically grown their spending on the platform enough to more than offset revenue lost from merchants who leave. **Payments and financial services.** Shopify Payments is the largest single revenue driver. In 2025, 65.6% of GMV ($248.1 billion) ran through it, up from 61.9%. The service relies on payment technology from two suppliers, Stripe and PayPal. Around it sit: - Shop Pay and Shop Pay Installments, for buyer checkout and buy-now-pay-later. - Shopify Balance, which manages merchants' funds. - Shopify Capital, which provides sales-based-repayment loans and merchant cash advances. In the United States and some other markets these are originated by bank partners, and Shopify buys certain of them. - Shopify Credit, a line of credit Shopify funds from its own balance sheet. Because Payments costs (card-network and processing fees) are far higher than subscription costs, the shift toward merchant solutions has steadily pulled the overall gross margin down. Management describes the stream as good for operating margins anyway, because it needs much less sales, marketing and development spending. **Platform, AI and ecosystem.** The platform is a single-version, multi-tenant cloud system built largely on Ruby on Rails and run mostly on Google Cloud. More than 21,000 third-party apps were in the Shopify App Store at year-end 2025. AI features include Sidekick, an AI commerce assistant, and Agentic Storefronts, which let buyers discover and check out merchants' products through AI platforms. Shopify does not build its own foundational AI models; it licenses third-party models. It had about 7,600 employees at year-end 2025 and runs a remote-first workplace. **Competition.** The 10-K describes the market as competitive, fragmented and changing. Merchants can assemble alternatives from ecommerce software vendors, content-management systems, payment processors, point-of-sale providers, shipping and fulfillment services, alternative lenders and marketplaces. Shopify names product vision, ease of use, multichannel integration, its app ecosystem, pace of innovation, use of AI, and reliability as the factors it competes on. **Shape of the business today.** Shopify reports as a single operating segment and judges performance on consolidated net income. Its business is seasonal: GMV and merchant-solutions revenue peak in the fourth-quarter holiday season. In the second quarter of 2026, 63% of revenue came from US merchants, 20% from Europe, 10% from Asia Pacific, 5% from Canada and 2% from the rest of the world (10-Q, Note 14). Two past transactions explain the current shape of the business and its investment holdings: - Shopify sold its logistics businesses in the second quarter of 2023, after a $1,340 million impairment that year, and still guarantees certain leases tied to them. - It holds a large portfolio of strategic investments. These include an equity-method stake in Flexport, an option on Klaviyo shares and other public and private holdings, and their mark-to-market swings dominate the gap between operating income and net income. The most recent acquisition was Vantage Discovery, an AI search company in Austin, Texas, bought in March 2025 for $59 million in cash. Shopify is incorporated in Canada and qualifies as a foreign private issuer, but chooses to file on US domestic forms (10-K, 10-Q, 8-K). Its Class A subordinate voting shares trade on Nasdaq and the TSX. ## Risk factors *Source: Form 10-K for fiscal 2025, Item 1A, accession 0001594805-26-000007. The second-quarter 10-Q reports no material changes to these risk factors.* The 10-K's principal risks fall into a handful of groups. Below are the ones with the most direct bearing on results and on shareholders. - **Merchant retention and slowing growth.** Merchants can leave at the end of any term, and switching costs are often low. Many are small businesses that are especially exposed to inflation, weaker consumer spending, tariffs and supply-chain disruption. Shopify expects its growth rate to decline over time as its market share rises. It also warns that selling to large enterprise brands brings higher costs, longer onboarding and less predictable deal timing. - **Competition from larger platforms.** Some competitors have more resources and could use dominant positions elsewhere to disadvantage Shopify. The filing cites large technology platforms restricting access to data, which can hurt merchants' marketing. Merchants may also build their own tools with AI. - **AI execution and dependence on third-party models.** Shopify must turn its vision of "agentic commerce" into products merchants actually adopt, and it relies on outside AI model providers. If those providers change terms or cut off access, its AI features could be disrupted and costly to rebuild. AI-specific regulation is also emerging. - **Concentrated payment and hosting suppliers.** Shopify Payments depends on Stripe and PayPal, under agreements that renew every 12 months unless terminated. If either ended the relationship before a replacement was integrated, Shopify could face substantial delays and costs. The platform also runs on third-party cloud services, mainly Google Cloud, whose hosting costs have risen over time. - **Payments, fraud and financial regulation.** Shopify Payments, Shop Pay Installments and Shopify Balance expose it to chargebacks, fraud, unrecoverable merchant losses, card-network fines, and failure to meet the card industry's PCI data-security standard. They also expose it to evolving money-transmission, buy-now-pay-later and anti-money-laundering rules in many jurisdictions. - **Credit risk in Shopify Capital and Shopify Credit.** Shopify depends on bank partners to originate loans and merchant cash advances, and it funds Shopify Credit from its own balance-sheet cash, which it flags as a liquidity risk. A weaker economy would raise defaults. Changes in lending regulation could force the company to change or drop products. - **Cybersecurity and privacy.** Shopify holds payment and personal data for merchants and their buyers. It has suffered attacks before, including distributed denial-of-service attacks. It faces privacy regimes such as GDPR, CCPA and the California Invasion of Privacy Act; the latter two allow class actions. - **Tax.** Shopify operates in the United States, Ireland, Singapore and elsewhere under transfer-pricing arrangements that tax authorities could challenge. The Canada Revenue Agency issued a proposed transfer-pricing assessment for tax year 2020 in 2025; Shopify disagrees with it and intends to defend its position (10-Q, Note 12). Indirect taxes on online commerce, including digital services taxes, are another open exposure. - **Investment-driven earnings volatility.** The equity and other investments portfolio is concentrated in a small number of holdings. Their price moves, observable-price remeasurements, impairments and its share of Flexport's losses flow directly into net income. - **Macroeconomic, currency and seasonal exposure.** Most revenue is in US dollars, but a significant share of operating costs is in Canadian dollars, euros and pounds sterling, and local-currency billing is growing. A heavy fourth-quarter concentration means any holiday-season disruption would hit results disproportionately. - **Founder voting control.** Chief Executive Officer Tobias Lütke holds a Founder Share whose variable votes keep his voting power at no less than 40% and no more than 49.9%. At December 31, 2025, he controlled 40.09% of the aggregate vote, well above his economic interest. Class B shares carry 10 votes each. Class A holders therefore have limited influence over board elections and major transactions. - **People and culture.** Shopify depends on Mr. Lütke and other senior leaders, and on hiring scarce AI and engineering talent while working remote-first. Its "Flex Comp" system lets employees choose their own split between cash and equity, which can make quarterly cash and stock-based expenses volatile. - **Capital returns.** The share repurchase program does not oblige Shopify to buy any amount of stock, could reduce cash reserves, and may not increase long-term shareholder value. ## Management's discussion: fiscal 2025 *Source: Form 10-K for fiscal 2025, Item 7, accession 0001594805-26-000007.* **Revenue and volume.** Fiscal 2025 revenue rose 30% to $11,556 million from $8,880 million, faster than 2024's 26% growth. - **Merchant solutions** grew 35% to $8,804 million. More GMV ran through Shopify Payments: penetration rose to 65.6% from 61.9%, adding $67.2 billion of payments volume (up 37%). Merchants' Payments adoption rates dipped slightly (for example, North America 88% from 91%) as the product expanded into new countries, so management points to penetration as the better measure. - **Subscription solutions** grew 17% to $2,752 million. Subscription fees rose $360 million on more merchants and a richer mix of higher-priced plans such as Plus. - **GMV** grew 29% to $378.4 billion, or 28% in constant currency. - **MRR** rose 15% to $205 million. Management said its growth rate was lower than in 2024 because Shopify lengthened paid trials. **Margins and costs.** Gross profit rose 24% to $5,555 million, and gross margin slipped to 48% from 50%. The 10-K explains that growth in lower-margin merchant solutions tends to pull the overall gross margin down. Cost of subscription solutions also rose, including $83 million more for cloud and infrastructure. Operating expenses grew more slowly than revenue: - Sales and marketing: $1,663 million, up 19%, driven by $242 million more marketing program spend. - Research and development: $1,536 million, up 12%. - General and administrative: $471 million, up 15%. The prior year had been lowered by the reversal of a $55 million legal accrual after Shopify won the Express Mobile patent case; an appeals court affirmed that win in 2025. - Transaction and loan losses: $417 million, up 84%. This was the fastest-growing cost line, with $124 million more from Shopify Payments and $61 million more from expanded lending. Operating income rose to $1,468 million from $1,075 million. **Below the operating line.** Net income fell to $1,231 million ($0.94 per diluted share) from $2,019 million ($1.55), even though operating income rose. The investment line swung from an $853 million gain in 2024 to a $316 million loss in 2025. That loss included unrealized losses on public holdings and on the Klaviyo option, a $40 million loss on the Flexport stake, and a $123 million loss on the embedded derivative tied to the convertible notes. Interest income on marketable securities was $331 million, and the income tax provision was $278 million. **Cash, debt and capital.** - Operating cash flow was $2,033 million. - Shopify settled its $920 million of 0.125% convertible senior notes due 2025 on November 3, 2025, paying $1.0 billion in cash and a nominal amount of Class A shares. That left no notes outstanding at year-end. - Cash, cash equivalents and marketable securities were $5.8 billion at December 31, 2025, plus $975 million of longer-dated marketable securities. - Loans and merchant cash advances (net) rose by $560 million during the year. - In February 2026, the board authorized a share repurchase program of up to $2 billion of Class A shares. ## Current quarter: second quarter of 2026 *Source: Form 10-Q for the quarter ended June 30, 2026, accession 0001594805-26-000047, unless noted.* Revenue grew 34% in the second quarter. That matched the first quarter of 2026 and was faster than the 31% growth of the second quarter of 2025, according to the May 5 and August 5, 2026 earnings releases. **Revenue and volume.** - **Revenue:** $3,583 million, up 34% from $2,680 million (33% in constant currency, per the August 5, 2026 earnings release). - **Merchant solutions:** $2,781 million, up 37%. Shopify Payments revenue rose $624 million, as penetration reached 68% of GMV (from 64%) and payments volume grew 38% to $78.1 billion. - **Subscription solutions:** $802 million, up 22%, with subscription fees up $129 million on more merchants and more Plus plans. - **GMV:** $115.6 billion, up 32% (30% in constant currency), faster than the 31% growth of a year earlier. - **MRR:** $221 million, up 19%. Management said MRR growth was faster than a year earlier because the prior-year comparison was held down by the extension of paid trials. **Costs.** Gross profit grew 31% to $1,708 million, and gross margin eased to 48% from 49%. Merchant solutions, the lower-margin line, rose to 78% of revenue from 76%. Cost of subscription solutions rose 35%, including $37 million more for cloud and infrastructure, which the company says includes AI-related usage. Operating expenses totalled $1,220 million: - Sales and marketing: $498 million, with $85 million more marketing program spend, partly offset by $16 million lower employee costs. - Research and development: $445 million, including $34 million more for computer hardware and software, again including AI-related usage. - General and administrative: $136 million, mainly on higher indirect taxes. - Transaction and loan losses: $141 million, up 76%. Of the increase, $41 million came from the expanding lending business and $19 million from Shopify Payments. Operating income rose to $488 million from $291 million. **Net income.** Net income was $1,502 million ($1.16 per diluted share) against $906 million ($0.69), lifted by a $1,228 million net gain on equity and equity-method investments. Its components included: - $731 million from higher share prices of public holdings. - $522 million of gross unrealized gains on private holdings. Of these, $511 million came from remeasuring a single private investment after an observable price change. - An $11 million loss on the Klaviyo option. - A $22 million loss on Flexport. Other income, net fell to $59 million from $130 million. Interest income on marketable securities dropped to $66 million from $106 million, and foreign exchange produced a $7 million loss against a $24 million gain a year earlier. The tax provision was $273 million. For the first six months, revenue was $6,753 million (up 34%), operating income $870 million (from $494 million) and net income $921 million ($0.71 per diluted share), against $224 million. **Lending book.** Net loans and merchant cash advances were $2,184 million at June 30, 2026, up from $1,784 million at year-end. Shopify bought $1.4 billion of loans and advances from its bank partner in the quarter, against $1.0 billion a year earlier, and earned $91 million of interest and fee revenue on loans. The credit-loss allowance rose to $242 million. Balances 180 or more days past due made up 5.7% of the gross book, the same share as at year-end. After Canada amended its rules on merchant cash advances in 2025, Shopify switched its Canadian Capital product from advances to loans in April 2026. From that month it also presents merchant-cash-advance cash flows in investing rather than operating activities, which put a $37 million net outflow in investing for the quarter. **Capital returns and balance sheet.** - Shopify repurchased 12,645,957 Class A shares for $1.4 billion in the quarter. - In the first half it bought 16,859,976 shares at an average $114.63, or $1,933 million. - On June 2, 2026 the board raised the total authorization to $5 billion (8-K, accession 0001594805-26-000028); $3,067 million remained at June 30. - Cash, cash equivalents and marketable securities fell $831 million in the half to $4.9 billion, mainly because of buybacks and lending growth, partly offset by operating cash flow and maturing securities. A further $525 million of longer-dated securities sits in long-term investments. - Equity and other investments, including the Flexport stake, totalled $5.4 billion. This includes $2.7 billion of public holdings, $1.6 billion of private holdings, Flexport at $559 million, $587 million of convertible notes in private companies, and the Klaviyo option, written down to $9 million from $75 million at year-end. - Chief Financial Officer Jeff Hoffmeister adopted a trading plan during the quarter covering up to 20,000 Class A shares, ending June 15, 2027. **Outlook.** The August 5, 2026 earnings release (8-K, accession 0001594805-26-000046) guided the third quarter of 2026 as follows: - Revenue growth in the low thirties percent year over year. - Gross profit dollars growing at a mid-to-high twenties percent rate. - Operating expenses of 33% to 34% of revenue. - Stock-based compensation of $150 million. - Free cash flow margin in the high teens to low twenties. ## Subsequent events *Sources: Form 10-Q, accession 0001594805-26-000047 (cover page and Part II, Item 5); Form 8-K dated July 2, 2026, accession 0001594805-26-000035; Form 8-K dated August 5, 2026, accession 0001594805-26-000046.* The 10-Q has no separate subsequent-events note. It discloses no acquisition, divestiture, borrowing or securities issuance after June 30, 2026. The post-quarter developments in the filings are: - **Board change (July 2, 2026).** Director Prashanth Mahendra-Rajah, Chair of the Audit Committee, resigned effective immediately to take a full-time position with the US Department of Commerce. Joe Natale is expected to chair the Audit Committee. - **COO employment agreement (July 31, 2026).** Shopify signed a new employment agreement with Chief Operating Officer Jessica Hertz, tied to her relocation to Toronto. It replaces her March 23, 2022 agreement and leaves her base salary, equity awards and change-of-control benefits unchanged. It adds capped reimbursement of relocation costs, immigration and tax-preparation services, and housing assistance (purchase or rental, not both), subject to caps and limited to costs incurred within 24 months of the move. It also adds equalization amounts on her salary, equity and relocation benefits to offset the financial impact of the move. - **Principal executive office.** The 10-Q and the August 5, 2026 8-K list Shopify's principal executive office in Las Vegas, Nevada. The 10-K and 8-Ks filed through July 2, 2026 listed offices in Ottawa, Ontario and New York, New York. The filings do not discuss the change. - **Share count.** As of July 31, 2026, Shopify had 1,208,570,347 Class A subordinate voting shares, 78,073,584 Class B restricted voting shares and one Founder Share outstanding. On February 6, 2026 it had 1,226,037,779 Class A shares.