Specializing in an e-commerce platform focused on seamless digital checkout experiences, Shopify (SHOP 2.63%) has benefited from a long-running shift toward e-commerce. And this tailwind persists today. So, why has the stock dramatically underperformed the S&P 500 over the last five years, and why is its stock stumbling to start 2026?
It boils down to valuation. The growth stock's price got too far ahead of its fundamentals.
Shares are down about 15% year to date as shares seem to be taking a breather from the stock's more than 50% gain last year, as it regained ground it lost in previous years. But did the rebound go too far?
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Strong growth with robust cash flow
Despite the stock's recent pullback, the company has actually given investors a lot to like in terms of its underlying business performance.
For instance, Shopify demonstrated impressive business momentum in Q3. Its revenue rose 32% year over year, supported by gross merchandise volume (GMV) growth of the same rate.
This was notably an acceleration from Shopify's second-quarter revenue growth rate of 31% year over year. Even more, these growth rates mark a significant acceleration from Shopify's full year over year revenue growth rates in 2022 and 2023 of 21% and 26%, respectively.
Additionally, Shopify has accomplished this acceleration while generating substantial cash flow. The company posted $422 million in free cash flow in Q2 2025, with a 16% free cash flow margin. And this improved to free cash flow of $507 million in Q3, with an 18% margin.
AI catalysts
Helping the stock soar last year, the company gained momentum on hype surrounding AI themes. Shopify President Harley Finkelstein told investors in its most recent earnings call that it was now "entering what is likely to be a whole new era of agentic commerce" in which "Shopify is perfectly positioned to lead the way and empower more businesses using AI."
And the company has expanded Shopify checkouts to popular AI chats, including ChatGPT, Alphabet's AI Mode and Gemini app, and Microsoft's Copilot.
Shopify's checkout experiences in these AI products, along with agentic tools to support its merchants, could help the company maintain its strong growth throughout 2026.
The problem is valuation
In short, it's difficult to find anything going wrong with Shopify's business. But that doesn't automatically make it a good time to buy shares of the tech company's stock. With a price-to-earnings ratio of about 100 and a forward price-to-earnings ratio of 73, investors are pricing in not only rapid top-line growth over the coming years but also significant margin expansion.
Can Shopify live up to this valuation? It's possible. But I'd argue that shares are overvalued, as investors would likely do better if they buy into growth stocks like this when the price has some more room for error baked into the valuation.
Though it will be a while before we get a glimpse of Shopify's 2026 financials, investors should at least look for evidence that the company continued to grow at a robust rate in the fourth quarter of 2025. So, when the company reports its fourth-quarter results sometime in the first half of February, investors should look for Shopify to not just meet but hopefully even exceed its guidance for the quarter. For Q4, Shopify said it expected its revenue to grow at a rate in the mid-to-high twenties. To live up to its valuation, however, investors may want to look for a revenue growth rate of 30% or higher.
