On Oct. 28, before earnings, I covered Morgan Stanley‘s preview of Shopify: sales were booming, and a holiday test was coming. And I find it interesting how much small businesses now rely on online orders to reach customers beyond their immediate neighborhoods.
For many sellers, the holiday season can make a real difference to their year. Now the numbers are in. Shopify (SHOP) provides essential internet infrastructure for commerce, from first-time entrepreneurs to brands like Aldo, SKIMS, Supreme, and Vuori in more than 175 countries.
In the third quarter of fiscal 2026, it handled $119.15 billion in sales, up 29.5%, and revenue rose 32% to $3.74 billion. Free cash flow was $816 million, a 22% margin, up from 18% a year earlier.
President Harley Finkelstein said Shopify is “uncommonly good at operating in two realities at the same time,” the world merchants live in today and the one they are moving toward. However, that was little short of the high bar investors had set.
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Shopify grew 32%, but expectations ran higher
In a note shared with me at TheStreet, Morgan Stanley kept an Overweight rating and a $192 price target. It said it would be buying the pullback. Morgan Stanley said the disappointment reflects how far expectations had moved, not weaker merchant demand.
Reported sales growth eased to 29.5% from 32%, as foreign exchange shifted from a tailwind to a headwind. On a constant-currency basis, however, sales grew 30%.
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The fourth-quarter guidance helps. Shopify expects low-30s revenue growth and high-20s gross profit growth, ahead of Street forecasts and in line with big investors’ hopes. Easier comparisons and capacity added before Black Friday and Cyber Monday support the setup.
Not all of the profit is permanent. The 22% free cash flow margin beat the Street’s 20%, but part of it was from a two-week pause in some U.S. marketing, tax timing, and an accounting change. Spending moves into the fourth quarter, so Morgan Stanley sees margins there modestly light.
What’s powering Shopify’s growth
Growth was broad. International sales rose 32%, offline 30%, and B2B 74%. Of merchants adding in-store point-of-sale systems, 55% were new to Shopify, including Canada Goose, BevMo and The Body Shop.
B2B strength spans home improvement, electronics, and business supplies, with demand from customers in healthcare, foodservice, and agriculture. Shopify also added local payment methods and local-currency billing in 10 more countries.
Online shopping has become less tied to a seller’s physical location. A small business can now reach customers in different markets, accept payments in local currencies, and sell through its own website rather than relying entirely on a marketplace. That wider reach is part of what makes Shopify’s growth worth watching.
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Shopify earns more as shoppers pay through it. Payments penetration passed 68%, Shop Pay sales grew about 50%, and merchant solutions revenue rose 35% to $2.91 billion.
AI is the newer story. According to the note, AI-referred orders grew 3.3x versus 2.6x for traffic, and those shoppers converted 64% more often. Management says volumes are small and gave no share of sales.
Independent data points the same way. Adobe expects AI traffic to U.S. retail sites to grow 130% this holiday season, with online sales reaching $275.1 billion, and 77% of surveyed shoppers who used AI said they felt more confident in their purchase. 69% of them said they were less likely to return an item they bought.
Cost is the worry. Sidekick, Shopify’s merchant assistant, saw conversations rise 14% from the prior quarter while total costs fell 18%, so more use is not driving a proportional cost increase.
Morgan Stanley says buy the pullback
Subscription revenue grew 20%, below the Street’s 22%, though monthly recurring revenue growth of 19% met expectations. Morgan Stanley flags costly international expansion, price competition in Payments and Installments, and a macro slowdown as risks.
At 41x 2028 free cash flow, Shopify is not cheap. But the bank says it is in line with the sector at 1.6x when adjusted for growth, and it expects operating leverage to resume in 2027.
For the pullback that Morgan Stanley is talking about, Shopify fell from its recent high of $180.88 on Oct. 12 to a low of $135.65 on Nov. 3, according to Yahoo Finance. Since reporting earnings, however, the stock has started to recover and is now trading above $153.90.
For investors, the verdict is that a less emphatic beat doesn’t change the case, as more merchants consolidate on one platform while shopping fragments across search, social, and AI. The holiday test I flagged on Oct. 28 is now the next proof point.
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