The 1 Number Tech Investors Should Watch

Shopify’s Rule of 40 score of 52 shows it’s pairing fast growth with real cash generation, but the stock’s valuation demands near-perfect execution.

Amy Legate-Wolfe

Author Bio

Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Her work can also be found at Canada's National Observer, where she writes on the business side of climate action. Before joining Motley Fool Canada, Amy wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband.

Social Media

Follow Amy on LinkedIn and Canada Stock Digest.

Favorite Investment Quote

“October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published August 13, 9:30 am EDT

| More on: SHOP

Key Points

The Rule of 40 adds revenue growth and free-cash-flow margin to judge balance between growth and profitability.
Shopify scored 52 last quarter, with 34% revenue growth and an 18% free-cash-flow margin.
That’s excellent, but the stock is expensive, so any slowdown or margin slip could hit shares hard.

A tech company can grow sales by 30% and still chew through shareholder money like a teenager with access to the family credit card. Another can produce lovely profits while barely growing at all. Neither number tells the whole story, which is why investors may want to combine them.

The result is called the Rule of 40. Add a software company’s revenue-growth rate to its free-cash-flow margin. A total of 40 or more suggests the business is balancing growth and cash generation well. Suddenly, two messy financial statements have been reduced to one delightfully nosy number.

woman checks off all the boxes — Source: Getty Images

Why 40 is the magic number

Revenue growth shows whether customers are spending more, while free cash flow measures the cash left after operating expenses and capital expenditures. The latter can fund acquisitions, share repurchases, debt repayment, and further growth without repeatedly asking shareholders to open their wallets.

McKinsey found that barely one-third of software companies achieved the Rule of 40, while fewer sustained it. That makes the measure particularly useful while investors sort through Canadian AI stocks. Artificial intelligence (AI) can accelerate revenue, but the servers, engineers, marketing, and research behind it can also swallow cash at an impressive pace.

A high score doesn’t automatically make a stock cheap, nor should one terrific quarter earn a lifetime achievement award. Investors should track the number over several quarters and watch how management calculates free cash flow. Stock-based compensation, acquisitions, and temporary working-capital changes can occasionally give the figure a flattering camera angle.

Shopify just scored 52

Shopify (TSX:SHOP) offers an excellent real-world example. The Canadian commerce platform provides online stores, payments, shipping, lending, point-of-sale tools, and other services that help merchants sell almost anywhere. It isn’t a pure subscription-software company, yet the Rule of 40 still captures the balance investors need to see.

During the second quarter of 2026, Shopify stock increased revenue by 34% year over year and produced an 18% free-cash-flow margin. Add those figures together, and Shopify stock scores 52, comfortably clearing the traditional threshold. Better still, the margin improved from 16% one year earlier, even as the company continued investing in AI-powered commerce.

That improvement suggests Shopify isn’t merely purchasing growth. More merchants and transactions are moving through its platform, while a larger portion of revenue is reaching the bottom of the cash-flow statement. Management expects third-quarter revenue to grow in the low-30% range and its free-cash-flow margin to remain in the high teens to low 20s. If delivered, Shopify stock should stay above 40.

More improvements on the way

AI could help keep it there. Shopify stock is building tools that help merchants create stores, manage operations, and sell through AI assistants. As shopping shifts from typing searches into websites to asking an assistant what to buy, Shopify stock wants to remain the infrastructure completing the transaction. That connects AI adoption directly to payment volume and merchant revenue.

Investors noticed the quarter, sending Shopify stock sharply higher after the release. At roughly 98 times trailing earnings, the stock certainly isn’t hiding in the clearance aisle. Anyone buying stocks in Canada should recognize that such a valuation leaves little room for slowing growth or a disappointing margin.

Competition is another risk. Major technology companies are building their own AI-shopping tools, while merchants can switch platforms if Shopify stock’s fees become too expensive. Free cash flow can also fluctuate from quarter to quarter, making the trend more important than any single result.

Bottom line

For now, Shopify stock’s 52 shows growth and financial discipline pulling in the same direction. Investors watching that score each quarter may spot weakening momentum before it reaches the share price, or recognize when an expensive-looking tech stock is steadily growing into its ambitions.