Toast, Inc. (NYSE:TOST), a digital technology platform provider for the restaurant industry, has grown considerably since going public in 2021 but its share price has not ridden the bullish wave.
Worse still, since its stock market debut in September 2021, TOST dropped nearly 60%. That doesn’t necessarily mean it’s time to jump ship and abandon Toast, though. Quite the contrary, this fintech provider may well be on the cusp of realizing its potential.
From One Basement To Global Reach
Toast was started in a basement in 2012 by co-founders Aman Narang, Steve Fredette, and Jon Grimm. Over the past decade, the company has built an integrated software platform that helps restauranteurs and small businesses to better serve customers. But how?
Toast operates a cloud-based digital technology platform that offers software-as-a-service (SaaS) products and other technology solutions that power the restaurant operating system. The company’s software is Android-based, and includes vertically integrated solutions.
Toast is a pioneer in point-of-sale functionality, which reduces the time restaurants spend taking customers’ orders and helps the establishments to more efficiently handle payments. Its point-of-sale tier subscription starts at $69 per month, with an option for custom pricing also available.
After a decade or more in business, Toast still enjoys a large total addressable market, or TAM, that exceeds $110 billion. In the United States alone, the TAM is approximately $55 billion.
Somewhat extraordinarily, Toast operates in about 106,000 locations, and has grown massively in recent years. As of Q4 2021, Toast operated in 57 thousand locations, which grew to 79 thousand in 2022 before finally reaching the current figure.
Massive Financial Growth
Firstly, we look at its top line growth. In fiscal 2021, the company posted total revenue of $1.71 billion, increasing 107.2% compared to 2020, whereas in fiscal 2022 this figure increased by 60.2% versus the year prior to $2.73 billion. By FY 2023, total revenues improved 41.5% year-over-year to $3.87 billion. In each of those years, financial technology solutions were the primary drivers of sales and growth.
Toast has yet to reach profitability on a GAAP basis but, to its credit, the company’s losses have been declining over the past two years. In 2021, Toast had a net loss of $487 million, which fell to $275 million in 2022 and further to $246 million in 2023.
On a non-GAAP gross profit, basis the picture looks better. The figure went from $341 million in 2021 to $562 million in 2022 (reflecting a growth of 64.8% year-over-year) to $903 million in 2023 (registering an improvement of 60.7% from the prior year). In other words, compared to 2021, non-GAAP gross profit has almost tripled.
Two more positive signs can be seen in the company’s financials. First, adjusted EBITDA posted its first positive value, going from a loss of $115 million in the prior year to earnings of $61 million in 2023.
And secondly, free cash flow also came in positive for the first time thanks to a switch from an outflow of $189 million in FY 2022 to an inflow of $93 million last year.
The company considers the Annualized Recurring Run Rate (ARR) that measures the scale of its subscription and payment processing services as a key operational metric. Notably, this figure has also steadily grown in recent years. As of December 31, 2023, the ARR stood at $1.22 billion, a rise of 35% year-over-year.
Another crucial operational metric is Gross Payment Volume (GPV), which referrs to the sum of total dollars processed through the company’s payments platform. This figure grew by 38% in 2023 to $126.1 billion.
Will Toast Stock Bounce Back?
The odds of Toast stock bouncing back to old highs near its IPO level are slim in the eyes of analysts who have a consensus price target just a few percent higher.
A combination of poor gross margins and lack of profitability has translated to an enterprise that institutions have not favored and, as a result, share price traction has been challenging, and is likely to remain so.
Toast’s market capitalization was more than $31 billion on its debut. Sadly for shareholders, the timing could hardly have been worse with lockdowns hindering the usual hustle and bustle of restaurant and coffee shop visits, locations where Toast largely capitalizes on payment flows.
Certainly, the valuation at the time priced the company to perfection and factored in enormous growth estimates too. So, needless to say, it could not sustain its lofty valuation and the company now has a market capitalization that is substantially lower, closer to $12.7 billion.
It’s not all doom and gloom, though, and investors might be happy to know that Toast’s forward-looking prospects appear to be brighter. TOST share price has increased by more than 40% over the past year and its forward enterprise value/sales of 2.41x compares favorably to industry rivals.
With that said, shares are trading at 70.96x earnings when calculated on a forward non-GAAP basis, a multiple that is too high to sustain absent substantial and sustained top line growth, as well as a turn to profitability.
The company’s financial growth is likely a primary reason why Wall Street analysts see a marginal upside in the share price now as reflected by the consensus price target of $23.88 per share.
While we are bullish on Toast due to its vast growth prospects as digitization becomes a necessity for the restaurant industry to stay afloat (might we remind you of Toast’s huge addressable market), you should keep a close eye on the stock.
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