Grade: C — Some Red Flags, Investigate
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2026-02-11) + Yahoo Finance
Auditor: PricewaterhouseCoopers LLP (PCAOB ID 271) — Clean opinion
One-line verdict: Shopify processed $378.4B in GMV and generated $11.6B in revenue (+30%) with a net income of $1.2B. Operating cash flow of $2.0B at a 1.65x ratio to net income shows solid cash backing. But the A2 check fails: accounts receivable outpaced revenue growth for two consecutive years, and the M-Score of -2.17 sits in the grey zone (between -2.22 and -1.78). The M-Score is driven by DSRI of 1.155 (rising receivables), SGI of 1.301 (30% growth), and DEPI of 1.135 (slowing depreciation). Notably, the 10-K reveals that net income dropped 39% year-over-year from $2.0B to $1.2B despite 30% revenue growth — the swing was driven by a $316M net loss on equity and equity method investments in 2025 compared to $853M in gains in 2024. These investment swings make reported income unreliable as a measure of operating performance.
| Metric | Result |
|---|---|
| Red Flags | **1** |
| Watch Items | **2** |
| Checks Completed | **18/18** |
| Beneish M-Score | **-2.17** (grey zone — between -2.22 and -1.78) |
| F-Score (Fraud Probability) | **0.76** (0.28% probability) |
| Altman Z-Score | **12.67** (safe zone — no solvency risk) |
| Auditor | PricewaterhouseCoopers LLP — Unqualified opinion |
| Fiscal Year | 2025 (ended December 31, 2025) |
| Report Date | 2026-04-05 |
The Commerce Platform
Shopify enables merchants to sell across multiple channels. From the 10-K: "During the year ended December 31, 2025, our platform facilitated gross merchandise volume (GMV) of $378.4 billion, representing an increase of 29% from the year ended December 31, 2024."
The filing states Shopify had "millions of merchants from more than 175 countries," with 44% in the United States, 31% in EMEA, 16% in Asia Pacific, 5% in Canada, and 5% in Latin America.
Revenue breakdown from the income statement:
| Line Item | FY2025 | FY2024 | FY2023 | YoY Growth |
|---|---|---|---|---|
| Subscription Solutions | $2,752M | $2,350M | $1,837M | +17% |
| Merchant Solutions | $8,804M | $6,530M | $5,223M | +35% |
| **Total Revenue** | **$11,556M** | **$8,880M** | **$7,060M** | **+30%** |
The filing states: "During the year ended December 31, 2025, our total revenue was $11.6 billion, an increase of 30% versus the year ended December 31, 2024." Subscription solutions accounted for 24% of total revenues (down from 26% in 2024), reflecting the faster growth of merchant solutions — primarily Shopify Payments processing fees, lending, and shipping labels.
Profitability: Revenue Up, Net Income Down
| Metric | FY2023 | FY2024 | FY2025 | Trend |
|---|---|---|---|---|
| Revenue | $7,060M | $8,880M | $11,556M | +30% YoY |
| Gross Profit | $3,515M | $4,472M | $5,555M | +24% |
| Gross Margin | 49.8% | 50.4% | **48.1%** | Down 2.3pp |
| Income from Operations | -$1,418M | $1,075M | $1,468M | +37% |
| Net Income | $132M | $2,019M | **$1,231M** | **-39%** |
| Net Margin | 1.9% | 22.7% | **10.7%** | Volatile |
| EPS (diluted) | $0.10 | $1.55 | $0.94 | -39% |
The headline story: revenue grew 30% but net income fell 39%. Why? The answer lies in non-operating items:
The 10-K explains the investment portfolio is "impacted by fluctuations in the fair value of our equity investments in public companies with readily determinable fair values, observable changes or impairments associated with our equity investments in private companies without readily determinable fair values, changes in our equity method investment based on our share of income and loss."
Stripping out investment swings, operating income grew 37% — a much cleaner picture. But Shopify's reported net income is fundamentally unreliable from year to year due to mark-to-market volatility on its investment portfolio.
Gross margin declined 2.3pp to 48.1%. The filing notes: "Subscription solutions gross margin 81% (FY2024: 82%)... Merchant solutions gross margin 38% (FY2024: 39%)." The margin compression is driven by the mix shift toward lower-margin merchant solutions (which grew faster) and increased infrastructure costs.
Cash Flow: Solid
| Metric | FY2023 | FY2024 | FY2025 |
|---|---|---|---|
| Operating Cash Flow | $944M | $1,616M | $2,033M |
| Net Income | $132M | $2,019M | $1,231M |
| **CFFO / Net Income** | **7.15** | **0.80** | **1.65** |
| CapEx | -$39M | -$19M | -$26M |
| Free Cash Flow | $905M | $1,597M | $2,007M |
Cash flow quality is strong in FY2025 with CFFO/NI of 1.65. The FY2024 ratio of 0.80 was depressed because net income was inflated by $853M in non-cash investment gains. The cash flow statement shows the reconciliation: net income of $1,231M adjusted for stock-based compensation of $449M, amortization and depreciation of $31M, and other non-cash items. CapEx is minimal ($26M) — Shopify runs on cloud infrastructure.
Free cash flow of $2.0B is excellent for a company at this stage. Working capital was a slight use of cash due to increased non-cash working capital.
Investment Portfolio: The Wild Card
Shopify's balance sheet carries significant equity investments. Per the filing:
The $316M net loss on investments in FY2025 vs. $853M gain in FY2024 created a $1.17B swing in pre-tax income — explaining nearly all the decline in net income despite 30% revenue growth.
Balance Sheet: Clean
| Metric | FY2025 | FY2024 |
|---|---|---|
| Cash + Short-term Investments | $5,767M | $5,470M |
| Total Debt | $188M | $1,126M |
| Cash/Debt Coverage | 30.7x | 4.9x |
| Debt/EBITDA | 0.1x | — |
| Goodwill + Intangibles | $521M | $474M |
| Goodwill/Equity | 4% | — |
Shopify is essentially debt-free. Total debt dropped from $1,126M to $188M. Cash of $5.8B dwarfs the remaining obligations. Goodwill of $491M (4% of equity) is negligible.
The Altman Z-Score of 12.67 is exceptionally high, reflecting strong working capital, positive retained earnings, healthy operating income, and minimal liabilities relative to equity.
The 18-Point Screening
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | PASS | DSO 13.3 days, +1.8 days YoY. Modest increase |
| A2 | AR vs Revenue Growth | **FAIL** | AR outpaced revenue for 2 consecutive years |
| A3 | Revenue vs CFFO | PASS | Revenue +30.1%, CFFO +25.8%. Cash follows revenue |
| B1 | Inventory vs COGS | PASS | Inventory -19.2% vs COGS +36.1%. Inventory declining |
| B2 | CapEx vs Revenue | PASS | CapEx growth 36.8% vs revenue 30.1%. Normal |
| B3 | SG&A Ratio | PASS | SG&A/Gross Profit = 38.4% |
| B4 | Gross Margin | PASS | Gross margin 48.1%, -2.3pp. Within normal range |
| C1 | CFFO vs Net Income | PASS | CFFO/NI = 1.65. Profits backed by cash |
| C2 | Free Cash Flow | PASS | FCF $2.0B, FCF/NI = 1.63 |
| C3 | Accruals Ratio | PASS | Accruals ratio = -5.3%. Negative — excellent |
| C4 | Cash vs Debt | PASS | Cash $5.8B covers debt $0.2B. 30.7x coverage |
| D1 | Goodwill + Intangibles | PASS | $521M = 4% of equity. Negligible |
| D2 | Leverage | PASS | Debt/EBITDA = 0.1x. Essentially debt-free |
| D3 | Soft Asset Growth | WATCH | Other assets grew 85.7% vs revenue 30.1% |
| D4 | Asset Impairment | PASS | Write-offs normal |
| E1 | Serial Acquirer FCF | PASS | FCF positive after acquisitions |
| E2 | Goodwill Surge | PASS | Goodwill + intangibles change +10% YoY. Normal |
| F1 | Beneish M-Score | WATCH | **M-Score = -2.17 (grey zone)** |
A2 Context: Receivables Growing Faster Than Revenue
DSO increased from 11.5 to 13.3 days — not alarming in absolute terms, but the trend of AR outpacing revenue for two consecutive years is a quantitative flag. As Shopify expands into larger enterprise merchants (Shopify Plus) and extends credit through lending products, some receivables growth is expected. The D3 watch item (other assets +85.7%) is likely related to growth in the loan portfolio and investment balances.
Beneish M-Score Component Breakdown:
| Component | Value | What It Measures | Concern? |
|---|---|---|---|
| **DSRI** | **1.155** | **Days Sales in Receivables — rising** | **Moderate** |
| GMI | 1.048 | Gross Margin Index — slight decline | Slight |
| AQI | 0.948 | Asset Quality Index — improving | Good |
| **SGI** | **1.301** | **Sales Growth Index — 30% growth** | **Mechanical flag for fast growers** |
| DEPI | 1.135 | Depreciation Index — slowing | Moderate |
| SGAI | 0.910 | SG&A Index — operating leverage | Good |
| TATA | -0.053 | Total Accruals to Assets — negative | Good |
| LVGI | 0.652 | Leverage Index — deleveraging | Excellent |
The M-Score of -2.17 falls in the grey zone primarily because of DSRI (rising receivables), SGI (high growth), and DEPI (slowing depreciation). The SGI is mechanically elevated by 30% revenue growth — Beneish's model was calibrated on mature companies. The LVGI of 0.652 reflects dramatic deleveraging as debt dropped from $1.1B to $188M.
Key Risks from the 10-K
1. Merchant Solutions Margin Compression
Merchant solutions (76% of revenue) carries 38% gross margin vs. 81% for subscriptions. As this segment grows faster, overall gross margin will continue to compress. The filing warns that "revenue growth, certain costs may be more difficult to predict or outside of our control."
2. Investment Portfolio Volatility
The $1.17B swing in investment gains/losses between FY2024 and FY2025 makes reported net income unreliable. Investors focused on GAAP net income will see wild swings driven by mark-to-market adjustments, not operating performance.
3. Competition
The 10-K cites risks from "limited operating history in new and developing markets" and "undetected errors or defects in our software or hardware." The e-commerce platform market includes Amazon, BigCommerce, WooCommerce, and increasingly AI-powered competitors.
4. Transaction and Loan Losses
Transaction and loan losses surged to $417M in FY2025 from $227M in FY2024 — an 84% increase. As Shopify expands its lending business, credit losses will become a more material line item.
5. Deferred Revenue from Non-Cash Consideration
The filing discloses $141M in deferred revenue from non-cash consideration, down from $190M, related to strategic partnerships. This is unusual and warrants monitoring.
Key Financial Trends (4-Year)
| Metric | FY2022 | FY2023 | FY2024 | FY2025 |
|---|---|---|---|---|
| Revenue | $5,600M | $7,060M | $8,880M | $11,556M |
| Net Income (Loss) | -$3,460M | $132M | $2,019M | $1,231M |
| Gross Margin | 49.2% | 49.8% | 50.4% | 48.1% |
| Net Margin | -61.8% | 1.9% | 22.7% | 10.7% |
| CFFO | -$136M | $944M | $1,616M | $2,033M |
| CFFO/NI | 0.04 | 7.15 | 0.80 | 1.65 |
| FCF | -$186M | $905M | $1,597M | $2,007M |
| Cash | $5,053M | $5,000M | $5,470M | $5,767M |
| Total Debt | $1,396M | $1,150M | $1,126M | $188M |
| GMV | — | — | $293B | $378B |
| SBC | — | $615M | $430M | $449M |
Summary
Grade: C. One red flag and two watch items — the investment portfolio volatility is the real story.
Shopify's core business is excellent: $11.6B revenue growing 30%, $378B in GMV (+29%), $2.0B in free cash flow, essentially no debt, and a Z-Score of 12.67. The A2 flag (AR outpacing revenue) is real but modest — DSO increased by less than 2 days. The M-Score grey zone reading is mechanically driven by 30% growth and does not indicate manipulation.
The genuine concern is the reported net income volatility. A $316M investment loss in FY2025 vs. an $853M gain in FY2024 created a $1.17B pre-tax swing that had nothing to do with selling subscriptions or processing payments. Shopify's operating income grew 37% — a clean, strong signal. But the GAAP bottom line is hostage to the mark-to-market treatment of equity investments.
The D3 watch (other assets +86%) likely reflects the expanding loan portfolio and investment portfolio. Transaction and loan losses of $417M (+84% YoY) signal growing credit risk as Shopify moves deeper into financial services.
Investors should focus on operating income and free cash flow rather than net income. By those measures, Shopify is executing well.
**Disclaimer**: This report is based on Shopify's fiscal year 2025 10-K filed with the SEC on February 11, 2026. This is NOT investment advice.
**About EarningsGrade**: We screen earnings reports for financial red flags using an 18-point forensic framework. Grade C means some red flags were detected that warrant investigation.