Hitting the public markets in September 2021 was probably poor timing for Toast (NYSE: TOST). Shares were up in the first few weeks following the initial public offering (IPO). However, they have cratered since then.
Shares of this software-as-a-service business currently trade 62% off their all-time high, now at a compelling price-to-sales ratio of 3.1. This might be all the convincing that investors need to buy the stock. But before you do, here are three must-know facts about Toast you can’t ignore.
Supporting the restaurant industry
Toast offers point-of-sale hardware devices as well as a wide range of cloud-based software and financial services that cater strictly to the needs of the restaurant industry. Offerings include payment services, marketing, payroll, team management, and the ability to seamlessly handle multiple ordering channels.
Anyone who’s not only worked in the restaurant industry, but who’s been to one as a customer, knows how complex things are and how much is going on at any given moment. Toast prides itself on being the go-to operating system for restaurant owners, operators, and employees who can appreciate having a single user interface for all their needs.
Toast’s growth prospects
Toast’s stock might be trading well off its peak because the business isn’t posting the greater than 50% annual revenue growth that it was throughout 2021 and 2022. However, the gains are still very healthy.
In the latest quarter (the second quarter of 2024, ended June 30), Toast reported a revenue jump of 27%. This was driven partly by adding 8,000 net new customers. The gain was also supported by annual recurring revenue, which includes subscription and payment processing, being up 29%.
There’s still a long runway to bring on more customers. Toast has a 14% market share of the 860,000 restaurant locations in the U.S. Add in the fact that there are 22 million locations in total internationally, and it creates a sizable total addressable market (TAM).
Plus, it is estimated that this year, the U.S. restaurant industry will spend $55 billion just on technology. Based on its trailing 12-month revenue of $4.4 billion, Toast currently has a tiny sliver of this massive opportunity.
One way the company will grow its customer base is via product development. It’s not surprising that recently, artificial intelligence (AI) has been a focal point for the leadership team. The business is using generative AI to help its customers develop more effective marketing campaigns.
Even though there are still so many restaurants both domestically and internationally that could one day become Toast customers, it’s not reasonable to assume the business will automatically capture the majority of its TAM. There’s certainly competition out there. And Toast is not guaranteed to translate its huge success in the U.S. to other countries.
Path to profitability
Since its founding more than a decade ago, Toast has been heavily investing in growth initiatives. As a result, it hasn’t been consistently profitable. In 2023, the business posted a net loss of $246 million.
The latest quarter could be the start of a new trend, though, as Toast produced positive net income of $14 million. Investors should pay very close attention to the company’s profitability trends in the quarters and years ahead.
You would think that as Toast’s customer base keeps growing and its revenue base continues to expand, it will be able to better leverage its fixed costs, like sales and marketing and research and development. After all, software companies do scale extremely well as their sales start to outpace expenses. Investors should hope that management can execute in this regard.
The market is optimistic. According to Wall Street consensus analyst estimates, Toast will generate earnings per share of $0.44 this year, which will rise 167% to more than $1.17 in 2026.
Investors looking to buy the stock now have a better understanding of what this business does, growth trends, and the profitability outlook.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Toast. The Motley Fool has a disclosure policy.
3 Must-Know Facts About Toast Before You Buy the Stock was originally published by The Motley Fool
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