Let's be honest: Most investors love Shopify (SHOP 1.11%) stock because of how much it's gone up in the past. The company went public less than 10 years ago and is already up close to 3,000%. For perspective, $1,000 invested in Shopify stock when it went public would be worth more than $30,000 today.

For some investors, Shopify is nothing more than a stock ticker. But it's crucial to understand what a stock's underlying business does, rather than only pay attention to the movement of its ticker.

Here's one small part of Shopify's business that has an outsize impact on profits.

How Shopify's business works

Shopify is an e-commerce software company. But it's hard to succinctly describe Shopify's business because it does so much. This includes things that one would expect, such as registering a domain name and building a website. But it also includes some surprising things. For example, the company has an app store, which generates ad revenue when a company promotes its app.

Shopify's business can be divided into two large categories: That which is needed to build an online presence and that which is useful for handling a transaction from start to finish. These mental categories largely correspond with the company's two business segments: subscriptions and merchant services.

With subscriptions, Shopify makes money by selling subscriptions to its platform (of course) but also by some other things such as the aforementioned domain registration. With merchant services, the company makes money by doing things such as processing payments and providing shipping labels.

In 2023, Shopify had gross merchandise volume (the dollar amount of sales on its platform) of $236 billion and gross payment volume (the dollar amount of payments that it processed) of $137 billion. These numbers are massive and small fees on these transactions naturally add up quickly to big numbers for Shopify.

Merchant services, therefore, is Shopify's bigger business segment, accounting for 74% of its revenue in 2023. But this segment isn't as high-margin as subscriptions.

Indeed, Shopify's subscription services revenue had a gross profit margin of 81% in 2023. And this part of the business was also faster-growing, with 23% revenue growth last year.

What investors should do with this knowledge

Understanding how a business works is a big part of building an investment thesis -- an explanation for why a stock can go up. In Shopify's case, it looks good that its higher-margin business is growing at a faster rate. But there's nuance here that needs to be understood.

Shopify raised its subscription prices in 2023. Price changes were different depending on the tier. But the smallest increase was 25%. The company's 23% growth for its subscription segment looks uninspiring with that context.

Since subscription revenue is higher-margin, Shopify's shareholders want this revenue source to grow. But the better path to growth is through gaining new subscribers, not charging more to existing subscribers. Unfortunately, the company doesn't provide subscriber numbers to investors. But it appears that it didn't gain too many in 2023 -- it seems most of the growth was from charging higher prices.

This is something for investors to watch with Shopify stock in 2024. The company is growing subscription revenue, which is quite important. But it's unclear whether the company is growing by acquiring new subscribers, which is more sustainable.

If subscription revenue continues climbing in 2024 for Shopify, that would be a great signal that new subscribers are paying up for services and it could lead to market-beating growth for the company.