Toast Stock Could Soar 21%, According to a Wall Street Analyst. Is It a Buy Now?

Shares of Toast (NYSE: TOST) recently got a little bump from a positive analyst note. Dan Dolev at Mizuho upgraded his rating on the stock to outperform and raised his price target to $33 per share.

Dolev's new price target implies a 21% gain over the next 12 months if the rest of the stock market begins viewing the restaurant software company in the same light as he does.

Is now a good time for you to buy Toast stock? Let's weigh this company's strengths against its challenges to see if it could be right for your portfolio.

Reasons to buy Toast

Not so long ago, if you were a restaurant owner who wanted to bring your business into the 21st century you had to employ heaps of different vendors. Your point of sale (POS) equipment provider almost certainly wasn't the same company that managed your employee payroll, and neither wanted anything to do with your website.

Toast was founded in 2012 to offer easier, integrated solutions, and in 2015 it signed up its 1,000th client. Growth has been off the charts, and as of March 31, Toast was managing orders, payments, and much more for 112,000 locations.

Toast receives a slice of each transaction, and its increasingly dominant position in the restaurant business appears defendable. Dolev noted that Toast is effectively the fourth largest retailer merchant in the U.S., and credit card interchange fees collected on each transaction by Visa and Mastercard are generally lower for the largest merchants.

Toast is still reporting net losses, but slightly lower interchange fees could give it a big leg up on any competition over the long run.

The company has plenty of growth opportunities to pursue. Earlier this year, Toast launched a suite of software to run a digital storefront, and a marketing software suite to complement its more traditional restaurant management services.

In addition to expanding services, Toast is going international. In the first quarter, it launched integrated online ordering in the U.K., Canada, and Ireland.

Reason to remain cautious

Toast's software platform is increasingly popular, but the business is still losing a lot of money. The company lost $83 million during the first three months of 2024 and $248 million over the past 12 months.

Toast has been running at a loss to gain a durable size advantage, but there's no guarantee that it will ever turn the corner on profitability. The stock is trading for about 58 times management's expectation for adjusted earnings this year before subtracting interest, taxes, depreciation, and amortization ( EBITDA ).

Toast's stock market valuation implies continued rapid sales growth and a bottom line that rises out of negative territory to become strongly positive. If restaurants have a bad year or anything else prevents this software business from achieving profitability soon, investors who buy at its present valuation could suffer heavy losses.

A buy now

Toast isn't a stock that anyone should bet heavily on. For those of you with a moderate to strong risk tolerance, though, adding some shares to a diversified portfolio and holding them for at least five years looks like a smart move to make right now.

TOST Total Operating Expenses (TTM) data by YCharts

Revenue continues to soar, but operating expenses have flatlined in recent quarters. Toast's sales representatives are getting more productive now that the platform's popularity has reached an inflection point, and strong profits could be around the corner.

Cory Renauer 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 .