Square continued to see impressive growth in the second quarter, but also continues to have issues in translating this growth into better profitability. Overall, we see little to change our long-term view, and will maintain our $49 fair value estimate and narrow-moat rating.
Square continues to see strong growth, with adjusted revenue up 46% year over year. The mix of this growth remained consistent as the company builds out more ancillary products, with transaction-based revenue up a relatively modest 24% and subscription and service-based revenue up 87%. To effectively scale, we think Square needs to both move upmarket and build out its ancillary services. The strong subscription and service growth provides supports for the latter idea, and the volume shift toward larger sellers provides evidence that Square can expand beyond micro-merchants. In the quarter, 54% of gross payment volume came from sellers with more than $125,000 in annual volume compared with 50% last year.
While Square's top line continues to soar, the company needs to show at some point that it can unlock the scalability of the business model and translate this growth into profitability. The quarter provided only limited evidence of this. Square's adjusted EBITDA margin did improve to 18.7% from 17.7% last year. However, this metric excludes line items that we consider real costs, primarily stock compensation. On a GAAP basis, the company continues to report modest losses. We appreciate the fact that margins might be held back somewhat by investment to maintain growth, but the company's inability to achieve strong margin improvement supports our view that Square's margins might ultimately be somewhat constrained given the relative lack of volume in its small business niche. We think that the current market price is overly optimistic about the company's long-term profitability potential.
We think Square's business model, characterized by efficient client onboarding, innovative point-of-sale devices, flat fees, and an internally developed and integrated set of software solutions, allows the company to reach and retain micro merchants that are unviable for other acquirers. In essence, we believe Square's success has largely come from expanding the acquiring market, as opposed to stealing material share from existing players.
To develop sufficient scale, Square must move past its micro merchant base, and recent results suggest it is doing just that. At this point, slightly more than half of its payment volume comes from merchants generating over $125,000 in annual gross payment volume. Furthermore, absolute growth in clients above this threshold has accelerated meaningfully over the past couple of years, while absolute growth in merchants below this threshold has largely held steady.
Additionally, the company is making significant progress in cross-selling ancillary services, such Instant Deposit and Caviar, into its merchant client base. We think the move upstream and cross-selling will allow Square to materially improve margins in the years ahead and show the viability of its business model.
But we see Square as a narrow-moat niche operator, not a disrupter, with market share limited by its relatively high pricing and long-term margins constrained by its relative lack of scale. We think the company's most value-creative long-term opportunity lies in expanding internationally, as opposed to displacing leading domestic acquirers.
The company's effort to build out a consumer business surrounding its Cash App creates some option value. However, this business looks like a long shot to us, as Square is competing in a space with winner-take-all dynamics, and its competitors have a sizable lead in users and large consumer customer bases. Further, we have concerns that Cash App could ultimately be a distraction from more attractive opportunities in the core business.
Payment processing of any type is a highly scalable business, as once a payment platform is established, there is little incremental cost to additional transactions. As a result, a handful of acquirers have come to dominate the industry. However, these traditional players left some areas open for new competition. Square initially rose to serve micro merchants, which are economically unviable for larger acquirers because of low volume. We think Square's business model, characterized by client onboarding, innovative point-of-sale devices, flat fees, and an internally developed and integrated set of software solutions, allows it to reach and retain these merchants effectively. Square has seen dramatic growth over the years, and while it remains unprofitable, we think the company's position in its niche is solidified and that it is nearing the point where it can generate attractive returns. As a result, we are changing our moat rating to narrow from none.
While Square's overall acquiring market share is tiny (we estimate that the company has about 1% of the U.S. market), we think that, in terms of scale, market share should be viewed in the context of the merchant segment an acquirer serves. For example, Global Payment's market share is much smaller than Worldpay's or First Data's, but we believe that within the small and midsize merchant base where the company focuses, its share is sufficient to create economies of scale. Similarly, we think Square's position among micro and small merchants has reached a point where the company has developed a cost advantage over any potential new entrants. We view switching costs as a secondary moat source for acquirers. On this front, we think Square looks good, as well. We believe the company's focus on building out an internally developed and integrated set of software solutions has been one of the keys to its success, and the ability to bundle acquiring within a larger set of solutions has become increasingly important for merchants. Larger acquirers often rely on partnerships with outside software companies, whereas Square generally controls the entire customer relationship. Its focus on micro and small merchants makes this more feasible, as their needs are not as complex. However, we believe this makes switching costs a more important aspect of Square's moat, relative to larger acquirers.
Recent results suggest that Square can make some inroads and move upstream in terms of merchant size. At this point, a little more than half of the company's gross payment volume comes from merchants generating more than $125,000 in annual gross payment volume. In our view, this is roughly where these merchants start to become viable for more traditional acquirers. We believe Square's suite of offerings, quick start-up time, and simplified pricing will allow it to attract enough merchants above the $125,000 level to scale and reach an attractive overall return. However, Square's pricing is significantly higher than that of traditional acquirers (we estimate Square's net revenue as a percentage of gross payment volume to be about double that of Global Payments), which we believe will be a limiting factor. In sum, we think Square can carve out enough share in its niche to become a sustainable and attractive franchise, but we do not see it as disruptive to the larger acquirers.
While profitability is trending in the right direction, Square remains unprofitable. However, we think scale in the acquiring service and the contribution from ancillary products such as Caviar and Square Capital will lead to strong margin improvement and excess returns within a few years, and that returns in the years following will be multiples of any reasonable cost of equity, given the limited amount of capital the business requires.
We are increasing our fair value estimate to $49 per share from $44. The increase is mainly due to time value since our last update, but we have also modestly adjusted our growth and margin assumptions. Our fair value estimate equates to a price/2019 sales ratio of 4.4 times and 66.0 times adjusted 2019 earnings.
We forecast strong growth overall, with total revenue growing at a 27% compound annual growth rate over the next five years and 19% over the next 10. We project acquiring revenue to grow at a 15% CAGR over the next 10 years. If the domestic acquiring market grew at an 8% rate over this time frame, this would imply roughly 4%-5% market share for Square at the end of our 10-year projection period.
We expect growth in subscription/service revenue to be much stronger and for this area to be a more critical growth engine. Due in part to the low starting point, we project subscription/service revenue to grow at a 40% CAGR over the next five years and 27% over the next 10. By the end of our projection period, subscription/service revenue makes up about 35% of total revenue.
We expect margins to improve fairly dramatically in the years ahead, as Square more fully monetizes its client base and scales. Management prefers an adjusted EBITDA margin metric. This figure excludes interchange revenue from the top line and excludes certain costs. We don't see this metric as indicative of true profitability as it excludes stock compensation, which we view as a real and ongoing cost. However, management has said it believes the company can achieve a level of 35%-40% on this basis, although it hesitates to give a timeline. Our projections assume Square can ultimately achieve a level close to the top end of this range. This EBITDA margin level equates to a GAAP operating margin of 16% by the end of our 10-year projection period. On a comparable basis, this is a level lower than that achieved by larger acquirers, which we believe this is reasonable due to the limited amount of scale available within Square's micro and small merchant client base.
We use a cost of equity of 9%.
Because Square's revenue is directly tied to revenue at its merchant customers, it is sensitive to macroeconomic conditions, and its focus on micro and small merchants magnifies this dynamic, as small merchants can fail in large numbers during recessions. We think its clients' demonstrated eagerness for products such as Instant Deposit and Square Capital suggests its client base might be fragile, and we would note that the company's rise has taken place in the context of an improving economy. If the performance of Square Capital loans is weak, Square's investors could flee, which could magnify the economic impact in the rest of the business. Square's international operations also present currency and execution risk. Historically, the industry has experienced system breaches, which creates event risk. Finally, the company's efforts to launch a consumer business surrounding its Cash App could fail, and payment platforms tend to exhibit winner-take-all dynamics, which could leave Square's platform sputtering if it is not a long-term leader.
Square is a fast-growing, highly scalable business, which creates a wide range of possibilities. This consideration is the primary factor behind our very high uncertainty rating.
Our stewardship rating for Square is Standard. The company is led by Jack Dorsey. Dorsey and Jim McKelvey founded the company, and McKelvey remains on the board. We credit management with developing a unique business model, and we think management's holistic approach to designing a suite of services useful to its merchant clients has been a key pillar in Square's success.
On the negative side, Dorsey is splitting his time across two companies (he is also the CEO of Twitter), and we think investors should recognize that he effectively has control of Square, as he serves as both CEO and chairman and owns about 45% of shares.
We think Dorsey's conflicts are especially important at the moment, as we have concerns that the Cash App could prove to be a distraction. Square is still a small business with a lot of growth prospects on the acquiring side, which is still growing at almost a 30% rate. Further, we think Square's model is well suited for international expansion, an area the company has just begun to explore. We think Square has more than enough value-creative opportunities on the merchant side to fully occupy management's attention, and the launch of the Cash App business could lead to some of those opportunities being missed.
CFO Sarah Friar recently departed. We don't see this as a sign of internal strife, as she left to take a CEO role at social network Nextdoor. But with Dorsey's attention divided, the CFO role at Square takes on somewhat outsize importance. In January, Friar was replaced by Amrita Ahuja. Ahuja previously spent eight years at Blizzard Entertainment and held the CFO position there.
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