Do you like to eat out? You might have noticed recently that more and more restaurants have shiny new hardware to take orders and accept payment, whether fast food or sit-down style.
What you don't see is what's going on behind the scenes, and how the hardware is connected to software that automates most of a restaurant's operations. Places that use these automated platforms can run more efficiently and save money, and it's a no-brainer in today's digital age.
Toast (NYSE: TOST) is one of the most popular versions, and it's growing quickly. Its stock is down 57% since it went public, and now might be a great time to buy shares.
The case for Toast
Toast has been demonstrating high growth since its initial public offering in 2021, and it's been keeping that up despite inflation. Annual recurring revenue, its preferred top-line growth metric, increased 32% year over year in the 2024 first quarter, and gross payment volume (GPV) increased 30%.
It continues to add locations rapidly: 6,000 joined in the first quarter, and it ended the quarter with 112,000, or a 28% increase over last year. It has 13% of all U.S. restaurant locations on its platform. That speaks to its popularity, but it leaves the vast majority available to capture.
There are several growth opportunities that management has identified and is already investing in. It continues to add locations in its core business at a healthy pace, and 20% of new locations come from referrals.
In one case study it highlighted, 70% of restaurants that opened last year in Austin, Texas, signed up for Toast's platform. Restaurants already in operation might be slower to switch, but as new restaurants open with a digital infrastructure, they're going to choose a platform like Toast.
Within this category, it continues to roll out new products to generate higher spending from existing clients, such as the recently launched Digital Storefront and Marketing Suites. Another way it's expanding here is by providing services at the corporate level in addition to the restaurant level, with multi-location solutions like menu management.
It's also beginning to target international locations. Toast has only 2,000 right now, but it sees a market of more than 280,000.
Lastly, the company is piloting a new product geared toward food retailers, like supermarkets. It's based on the same automated technology that powers its restaurant software and offers services targeting food retail like inventory optimization and e-commerce integration. It has 1,000 locations right now, a fraction of the total market opportunity.
Why is Toast down?
Toast isn't profitable, but it's making progress in that direction. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) improved from a $17 million loss last year to a positive $57 million this year, but its net loss expanded from $81 million to $83 million. There were other positive indications, including a 43% increase in gross profit , and management expects positive free cash flow for the full year.
Toast is still in scaling-up mode, which is weighing on the bottom line. But its business model supports an eventual swing to profitability. It benefits from a flywheel effect, in which clients ramp up spending after they join the platform. That adds to revenue organically while also contributing to better margins, since this growth comes with less associated marketing costs. Wall Street expects a loss per share in 2024 but positive earnings per share in 2025.
The stock came into being at a time of tremendous bullish sentiment and astronomical valuations. It corrected during the previous bear market, and it's now in a better place to do some serious growing.
Toast looks tasty
Many restaurant stocks tanked recently after market indications that they're facing a pullback in spending. It looks like investors see how Toast is more resilient than the restaurants it serves because they will continue to subscribe, pressures or not.
Slowdowns can possibly work in Toast's favor, counterintuitively, because even though GPV might be sluggish, more restaurants will be looking for ways to become more cost efficient and will join Toast's platform. That's a big thumbs-up for the company, which is already demonstrating how it could play a big part in the restaurant industry for years.
The stock is up 46% this year and trades at a price-to-sales ratio of 3.5. Toast has some hurdles to overcome, but investors see a strong long-term picture, and its stock could be a bargain at the current price.
Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Toast. The Motley Fool has a disclosure policy .
Most Popular
Comments / 0