What to Know Before Buying Shopify Stock

Shopify (NASDAQ: SHOP) stock is a market favorite. It's up 284% over the past three years, crushing the market, and it could go a lot higher.

Let's check out what's so great about this e-commerce giant.

What does Shopify do?

Shopify doesn't sell merchandise online, but it's still an e-commerce giant. It provides the backroom infrastructure that helps online retailers operate and succeed, and it's increasingly offering more omnichannel services that open up its market and give it greater reach.

It's still best known for the complete website development it offers on a monthly subscription basis. If you're a small business and want to get online quickly, arguably the best way to do that is going to Shopify, where you can get a full-service digital store up and running within minutes. For a monthly fee, Shopify will handle everything, from a customized storefront to payment processing.

Image source: Getty Images.

These days, any retailer can sign up for individual services that can complement a presence that's already online, or even offline, like cross-border services or point-of-sale devices.

However, Shopify makes the vast majority of its revenue from payment processing. Every time someone makes a purchase on a website that uses Shopify's payment processing services, the company takes a fee.

How does Shopify stack up against the competition?

Shopify is the top e-commerce software company in the U.S. by far, accounting for 30% of the market share. Its main competitor is Wix, which has about 23%. It accounts for more than 12% of all U.S. e-commerce, which includes e-commerce retailers like Amazon.

However, it faces greater competition internationally, where it's up against WooCommerce and SquareSpace. Shopify is trying to push harder into international waters, and it has been launching new products in more global locations.

As it becomes more of a total commerce company instead of a strictly e-commerce business, it's already competing against companies like PayPal, Block's Square business, and many of the traditional leaders.

How is Shopify performing?

Shopify has been growing rapidly, and after some recent cost-cutting measures, it's also growing profitably. Revenue increased 32% year over year in the third quarter, and operating income increased 25%. Free cash flow was up 20% with an 18% margin.

There are many growth drivers for the expanded platform. These include the core growth drivers like new small businesses and higher penetration of retail e-commerce, as well as internal initiatives like rolling out new international products and adding new services to the platform.

Is Shopify stock still beating the market?

Shopify stock is up 32% this year, beating the market, and there are good reasons to suspect that it can continue this outperformance for a long time. However, investors should be aware that Shopify stock is quite expensive, trading at a P/E ratio of 103 and a price-to-sales ratio of 17, so there may be some high-octane growth expectations already built into the price.

Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Block, PayPal, Shopify, and Wix.com. The Motley Fool recommends the following options: long January 2027 $42.50 calls on PayPal and short December 2025 $75 calls on PayPal. The Motley Fool has a disclosure policy.