Toast Stock Is Up 45% This Year. Can the Rally Keep Going?

Toast (NYSE: TOST) has quickly emerged as a leader in the digital transformation of the restaurant industry.

While the stock got off to a sour start following the company's 2021 initial public offering -- declining by more than 75% from its peak -- the latest trends suggest this tech player has finally found a recipe for success. Strong operational momentum and an improving earnings outlook have fueled an impressive 45% stock price rally this year.

With shares trading near a 52-week high, could shares of Toast still make an appetizing addition to your portfolio?

A strong start to 2024

While point-of-sale equipment and food ordering technology have long been staples of small and large dining establishments, Toast stands out with its vertically integrated platform. Its cloud-based management suite supports all aspects of often-complex restaurant operations.

Toast offers an end-to-end solution that covers table reservations, order management, kitchen operations, inventory control, payments, back-office accounting, human resources tools, and more.

The latest numbers highlight the accelerating adoption of its platform across the industry. In the first quarter, Toast products were used by 112,000 restaurant locations, up 32% year over year and more than double the 52,000 locations it had when it went public in Q3 2021.

The company claims it commands a 13% market share of the U.S. restaurant industry, but it's in what may still be an early stage of its growth cycle.

Given that it operates under a subscription business model, annual recurring revenue is an important metric for Toast. In Q1, that rose 32% year over year to $1.3 billion. The company is benefiting both from the addition of new accounts and from established customers signing up for new features.

Its expanding scale has been positive for earnings. In Q1, it booked adjusted EBITDA of $57 million, in contrast to its loss of $17 million a year earlier. For the full year, Toast is guiding for adjusted EBITDA in the range of $250 million to $270 million; its previous guidance range had a midpoint of $210 million. Either would be a major ramp-up compared to its $61 million result in 2023.

Image source: Toast.

Several reasons to stay bullish on Toast

What I like about Toast as an investment opportunity is its disruptive position in a niche that remains highly fragmented.

In contrast to competitors like Par Technology, Lightspeed Commerce , and Block , which specialize in a particular workflow such as point of sale or payments, Toast delivers a compelling value proposition for businesses looking to consolidate all their front-of-house and back-end digital infrastructure. Its goal is to gain market share in the United States while expanding internationally.

Maybe the biggest development for Toast this year was its entry into the food and beverage retail vertical. Here, the company plans to leverage its technology in areas like e-commerce, serving customers such as independent grocers and wine shops, adding to its addressable market.

The key for the company will be to keep delivering top-line momentum, which would indicate it's successfully executing on its strategy.

In terms of valuation, Toast trades at 51 times the upper end of management's 2024 adjusted EBITDA guidance range against its current enterprise value of $13.7 billion. While that enterprise-value-to-EBITDA ratio is lofty, I believe the premium is reasonable given the financial trends and growth opportunities.

According to analysts' average estimate, Toast's EBITDA will climb toward $439 million by next year. Based on that, investors can look forward to narrowing valuation multiples as the company grows and becomes more profitable. Overall, there are many reasons for the stock's rally to keep going.

TOST EBITDA Estimates for Current Fiscal Year data by YCharts.

Shares of Toast look tasty

On my list of attributes for a compelling growth stock, Toast checks off several boxes -- category leadership, top-line growth, climbing profitability, and a solid net-cash balance sheet.

As long as macroeconomic conditions remain favorable, I see room for shares of Toast to climb higher. For investors with long time horizons, a small position in the stock could work in the context of a diversified portfolio.

Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Block, Lightspeed Commerce, and Toast. The Motley Fool has a disclosure policy .