Is Toast stock a buy?
Posted on 25 May, 2024 . 5 min read
I guess we'll get started. Welcome, everyone. Thank you so much for joining. If you have any questions, feel free to stop and ask, either through the chat or directly. Today, we are going to discuss Toast, a restaurant technology company. We’ll talk about it for about 15-20 minutes and give our overall recommendation. As I said, if you have questions, feel free to ask.
So, why are we covering Toast? I’m always interested in companies that are small today but have the potential to become really large over the next 5, 10, or 15 years. Toast went IPO in about 2021, right after or during COVID, and they are still a pretty young company, about 11-12 years old, and doing well in revenue. I thought it would be interesting to take a closer look at it.
If you’ve never checked it out or didn't even know, Toast is a public company. Their biggest product is a point-of-sale system for restaurants. I first noticed Toast about six or seven years ago when I started seeing their terminals at restaurants. I would talk to the servers and the front staff, asking how they felt about the product, and overwhelmingly, they liked it. This piqued my curiosity, and I kept looking into it, even when Toast was still a private company.
At the time, I was working at Square, so it made sense for me to be aware of who else was in the market since Square also caters to restaurants. This led me to build a thesis around why Toast might be a good investment. I also looked at competitors like Clover, which was acquired by First Data, a traditional payments processing company. Clover’s innovation slowed after the acquisition.
Currently, it’s primarily a battle between Square and Toast. Square has multiple products focused on various industries, while Toast focuses on the restaurant industry. Let's dive into some numbers and graphs to see how Toast is performing and whether it’s a good long-term investment.
For detailed analysis, you can visit Xillion. Search for Xillion on Google, and we should be the first result. Once logged in, go to Analyze, where you will find all our stock analyses, including Toast. Over the past three months, Toast has grown 26%, 88% over six months, and 47% year-to-date. One year shows a 30% increase despite a dip late last year. Since its IPO, it initially saw a high valuation, which later dropped. I bought shares around May-June 2022, and since then, it has been steadily climbing, reaching a 52-week high. With a market cap of $15 billion, it’s still a relatively small company.
In comparison, Toast is about 1/100th the size of Amazon and 1/200th the size of Apple or Nvidia. Its overall stock performance has been good, with a valuation that is attractive. The price-to-sales ratio is 3.64, which is reasonable for a company in its growth phase. Compared to its peers, 63% have a higher price-to-sales ratio.
Growth-wise, Toast has shown stellar sales growth, with quarterly sales growing 31% year-over-year, which is very high by industry standards. Over the past five years, Toast has grown around 60% annually. They dominate the restaurant market, growing faster than 86% of their peers.
Profitability is lower due to their gross margin, which is common in the payments sector. Toast isn’t just a software company; a significant portion of their revenue comes from payments. Their gross margin is 94% behind their industry peers, but they are investing heavily in expanding their market.
Toast’s leadership is strong, with co-founders Aman Narin (CEO) and Steve (President) having been with the company since its inception. Both are MIT graduates and bring substantial expertise to the company. The leadership team and board members have a strong track record, contributing to a leadership score of five out of five from us.
Product diversity is also strong, earning four out of five stars. Toast serves mainly the US market but offers a comprehensive suite of products for restaurants, including point-of-sale systems, mobile ordering, payment processing, and more. Their transparent and straightforward pricing is a significant advantage, appreciated by restaurant owners for its simplicity.
Revenue growth has been impressive, particularly during and after COVID. They have doubled their revenue year-over-year, adding more than a billion dollars annually from 2021 to 2023. Despite the challenges of COVID, Toast innovated quickly, setting themselves up for future success. Their quarterly growth remains healthy at over 30%.
Gross profit is growing, though they are reinvesting earnings into the business. Their net income loss is shrinking, indicating potential profitability within the next one to two years. Once profitable, Toast could be added to the S&P 500, likely boosting their share price.
The price-to-sales ratio has been stable around four, which is healthy for a company balancing software and payments. Margins are improving, with losses shrinking, indicating a positive trend.
In summary, based on our years of research at Xillion, we believe Toast is likely to be a long-term winner. Key success factors include revenue growth and product innovation, supported by strong leadership. If Toast continues on its growth trajectory, it could significantly increase its market cap over the next 5 to 10 years.
Full disclosure, I own Toast shares, comprising about 5-7% of my liquid portfolio. I’m not planning to sell for another five years or so, as I believe in the company’s potential to grow significantly.
That concludes our analysis of Toast. Feel free to ask any questions you might have. I’ll stay around for another five minutes. There are no bad or silly questions, so please feel free to ask.