There’s a big difference between investing in a great company for the long term and buying its stock at the right price. And that difference becomes even more important when a business is growing rapidly, but its shares already carry a sky-high valuation due to enormous expectations.
Shopify (TSX: SHOP) could be a perfect example of such a stock. The Canadian e-commerce giant recently delivered another impressive quarter, with strong revenue growth, improving profitability, and healthy cash flow generation. Yet its stock has struggled to maintain consistent upward momentum, even as the underlying business continues to expand. This contrast raises an important question for long-term investors about how much future growth is already reflected in its share price.
Let’s take a closer look at Shopify’s latest financial performance and find out whether its premium valuation still leaves room for attractive returns in the long run.
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Shopify stock
After rallying by 46% over the last six months, SHOP stock currently trades at $210.47 per share with a massive market cap of $270.7 billion. However, the stock has slipped 4% over the last year and trades nearly 18% below its 52-week high.
While these recent fluctuations reflect an uneven share price performance, Shopify’s underlying business continues to deliver impressive results.
A great quarter backed by strong growth
Shopify’s latest quarterly financial performance gives investors several reasons to remain optimistic, even as its expensive valuation raises concerns.
In the third quarter, the Canadian commerce giant’s revenue jumped 32% year-over-year (YoY) to US$3.7 billion. This growth was backed by a 35% YoY increase in its merchant solutions revenue to US$2.9 billion. Meanwhile, its subscription solutions revenue rose 20% to US$836 million.
Shopify’s gross merchandise volume, which represents the value of orders processed through its platform, also climbed 29% YoY in the latest quarter. Similarly, its monthly recurring revenue climbed about 19%, highlighting continued growth in its subscription business.
Shopify’s profitability and free cash flow are also improving
Interestingly, Shopify’s profitability improved at an even faster pace in the September quarter. Its operating income surged 66% YoY to US$568 million as revenue growth outpaced the increase in operating expenses. As a result, the company’s quarterly net profit jumped 75% to US$462 million.
Adding to the optimism, Shopify’s free cash flow soared 61% YoY in the third quarter to US$816 million. Its free cash flow margin also improved to 22% from 18% a year ago, reflecting the company’s ability to turn growing sales into cash.
Can Shopify justify its premium valuation?
While Shopify’s latest results are impressive, its lofty market valuation means investors also need to pay close attention to its future growth prospects.
The good news is that Shopify isn’t showing signs of slowing down anytime soon. For the fourth quarter of 2026, the company expects revenue to grow at a low-thirties percentage rate YoY, while gross profit is projected to increase at a high-twenties rate.
Beyond these near-term expectations, Shopify continues to focus on expanding its commerce platform across more sales channels, including emerging artificial intelligence (AI)-powered shopping experiences. These efforts could help it reach more merchants and benefit from the growing adoption of digital commerce.
However, with a market cap exceeding $270 billion, investors are already paying a substantial premium for Shopify’s future growth potential. This leaves SHOP stock vulnerable to sharp corrections if business growth slows or profitability falls short of expectations.
Foolish takeaway
Overall, Shopify’s strong financial performance, expanding cash flow, and promising growth opportunities make it an attractive long-term growth stock. Still, given its sky-high valuation, I believe patient investors may find a better opportunity to buy SHOP stock during a pullback.
