Square (NYSE:SQ) stock has risen about 180% in the past year and 38% in the past three months alone, and soon its frothy valuation will be put to the test. The financial-technology company is scheduled to report second-quarter results on Aug. 1. The company has a price-to-sales ratio of about 11 -- up from about 8 one year ago -- and investors will be looking for it to deliver some exceptional growth.

Square certainly has nailed it when it comes to growth in recent quarters. The company's top-line growth has been accelerating for three quarters in a row, so it's no wonder investors are willing to pay a higher premium for the stock. Still, the question is: How sustainable is this accelerated pace?

An employee and customer interact with the two displays included with Square Register

Square Register. Image source: Square.

Ahead of Square's second-quarter update next month, here's an overview of two areas worth looking into after the report is posted.

Revenue growth

Square's recent acceleration in revenue growth obviously makes the company's top-line growth a metric investors should check on.

In Square's first quarter of 2018, net revenue and adjusted revenue (net revenue less transaction-based costs and bitcoin costs) increased an impressive 45% and 51%, respectively, year over year -- up significantly from 36% and 47% respective year-over-year growth in the prior quarter. This strong growth was helped by a 31% year-over-year increase in gross payment volume (GPV) and a 98% year-over-year increase in Square's subscription and services-based revenue. 

For Square's second quarter, management expects adjusted net revenue growth to accelerate yet again. The company guided for second-quarter revenue between $362 million and $367 million, or 52% year-over-year growth based on the midpoint of this guidance. Notably, however, the quarter will benefit from Square's recent acquisition of Weebly, which closed on May 31. Excluding the impact of Weebly, Square expects adjusted net revenue to rise about 49% year over year.

Adjusted EBITDA

Square's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin has seen some pressure recently as the company aggressively reinvests in its business. Square is aiming to capitalize on initiatives it believes will help it achieve long-term growth.

The company's track record of making investments in both existing and new products to drive future growth is good enough for management to get a pass from investors when it comes to the pressure it recently put on profitability. However, Square's adjusted EBITDA margin is something investors should keep an eye on. If it comes down too sharply, the company's  business model may look less attractive. In the first quarter, its EBITDA margin was 12% -- down from 15% in the fourth quarter of 2017 and 13% in the year-ago quarter.

But profitability looks poised to improve yet again. The midpoint of Square's guidance range for its adjusted EBITDA margin in its second quarter, when excluding the impact of the company's acquisition of Weebly, was about 17% -- up from 15% in the year-ago quarter.

Of course, investors should look at what's going on behind any adjusted EBITDA margin trends. As Square CFO Sarah Friar explained in the company's first-quarter earnings call (via an S&P Capital IQ transcript), Square's rapid growth is giving management an opportunity to make timely investments.

Friar explained: 

When you're growing at the pace that we're growing at, so over 50% this quarter, clearly, that's signaling that we have a lot of potential ideas in front of us right now. And so we don't want to go short on the investment there because the more we grow the ecosystem, bring sellers onto the platform, that provides a base that we can then go upsell and cross-sell into it.

But Friar noted Square still expects healthy margin expansion for the full year. Excluding the impact of its acquisition of Weebly, management had guided for a full-year EBITDA margin of 17% -- up from an EBITDA margin of about 11% in 2017. 

Square will report its second-quarter financial results after market close on Aug. 1 and host a conference call to discuss the results at 2:00 p.m. PDT on the same day.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.