Over the last four quarters, Square (NYSE:SQ) has seen a noticeable decline in the growth rate of its gross payment volume, or GPV. From July 2017 through June 2018, GPV grew between 30% and 31%. Over the most recent four quarters, GPV growth steadily fell from 29% to 25%.

That slowdown has at least one analyst worried. Nomura Instinet's Bill Carcache says the decline in GPV growth is due to greater competition for larger sellers, which make up an increasing percentage of Square's customer base.

It's important, however, to see the forest for the trees. Carcache's predecessor at Nomura, Dan Dolev, pointed out absolute growth in GPV is still climbing. Square added $5.4 billion in the second quarter this year compared to just $5 billion in Q2 2018.

Moreover, the war-on-cash company is increasing its investments in customer acquisition, as Susquehanna analyst James Friedman points out, which ought to lead to a reacceleration in GPV growth down the line. Furthermore, focusing exclusively on GPV discounts the valuable ecosystem Square has built around its payments business.

A person inserting card into Square Terminal device.

Image source: Square.

Growing for the long term

Square's CFO, Amrita Ahuja, said the company over-indexed its marketing efforts to efficiency at a recent investor conference. Square recoups its customer acquisition costs within three or four quarters of each new cohort signing up. That's an excellent metric, especially considering merchants tend to grow their business with Square over time. The company boasts positive revenue retention.

But that positive revenue retention means there should be more leeway to acquire new merchants at a higher cost. It might take longer for Square to recoup those marketing dollars, but it'll be growing off a bigger base. Ahuja outlined three areas of focus for the company's marketing spend: brand advertising (something it's had great success within markets outside the U.S.), lower hardware pricing, and continued growth in direct-response ads.

The increased investment in those areas will continue to put pressure on Square's EBITDA margin in the short term. That's another area of concern for Carcache. Adjusted EBITDA margin came in at just 18.7% in the second quarter, an expansion of just 1 percentage point compared to the year prior. Former CFO Sarah Friar once guided for mid-single-digit percentage point year-over-year margin expansion with a long-term goal of 35% to 40% EBITDA margin.

Again, focusing too closely on margin instead of absolute growth in EBITDA, which was greater than the year prior, could lead investors to misjudge Square's performance. Margins will expand over time as a result of greater top-line growth from customer-acquisition investments made today.

Expanding the ecosystem

As previously mentioned, Square boasts strong revenue retention rates. Part of its ability to retain merchants and increase the amount of business they do with Square is its ecosystem. The company's ecosystem of services increases switching costs while providing ancillary sources of revenue. Square can also use the ecosystem to provide better overall pricing than a piecemeal solution from multiple competitors.

Square's ability to innovate and add services is evidenced by the fact that adjusted revenue growth significantly outpaces its GPV growth. Square has shown adjusted revenue growth isn't tied to GPV growth, either, particularly from the start of 2017 to mid-2018, when adjusted revenue accelerated while GPV growth remained stable.

Increasing investments in marketing now and pushing out the payback period for new cohorts isn't necessarily permanent with the way Square innovates and brings new products and services to market. If it can hit on another set of services that resonate with its merchants, it'll see that payback period come back down, which may lead Ahuja to cast a wider net and increase marketing spend again.

But even if Square can't bring a new service to market that pushes adjusted revenue growth to climb well beyond GPV growth again, the positive revenue retention supported by its existing ecosystem of services gives it a lot more leeway for customer acquisition than it was spending previously. Those efforts should start showing up with a reacceleration in GPV growth down the line as Square adds bigger and bigger cohorts. It will have a short-term impact on margin expansion, but the long-term outlook for Square remains strong.