Toast, Inc. (NYSE:TOST) is a company that I believe has a unique advantage in capturing additional market share within the restaurant industry. This advantage stems from its combination of specialized software and payment solutions tailored to the needs of this vertical, complemented by new financial services products like Toast Capital, which fuel innovation and drive further digital transformation.
Toast has developed an innovative digital technology platform designed specifically to cater to the entire restaurant community&https://adarima.org/?aHR0cHM6Ly9tY3J5cHRvLmNsdWIvY2F0ZWdvcnJ5Lz93cHNhZmVsaW5rPXYxMXh5Vkk4dDR3QXBic0NhZGZFZUZsZ2lIbmlrY2xaV2FHSmlPRkEzYmxadmN6UXJUVlpxVTNka1FUMDk-8217;s needs. This comprehensive suite of software-as-a-service (SaaS) products and financial technology solutions empowers restaurants at every stage of their operations. With its wide range of products, tools, and capabilities, Toast offers a more efficient alternative to traditional models that rely on multiple vendors. This integrated approach is a key factor behind the company&https://adarima.org/?aHR0cHM6Ly9tY3J5cHRvLmNsdWIvY2F0ZWdvcnJ5Lz93cHNhZmVsaW5rPXYxMXh5Vkk4dDR3QXBic0NhZGZFZUZsZ2lIbmlrY2xaV2FHSmlPRkEzYmxadmN6UXJUVlpxVTNka1FUMDk-8217;s increasing market share.
One of Toast&https://adarima.org/?aHR0cHM6Ly9tY3J5cHRvLmNsdWIvY2F0ZWdvcnJ5Lz93cHNhZmVsaW5rPXYxMXh5Vkk4dDR3QXBic0NhZGZFZUZsZ2lIbmlrY2xaV2FHSmlPRkEzYmxadmN6UXJUVlpxVTNka1FUMDk-8217;s standout features is its advanced point-of-sale (POS) system, which offers flexibility and enhances the overall dining experience for guests. It simplifies the ordering process across various channels, including dine-in, takeout, and delivery. Additionally, Toast leverages its SaaS capabilities to streamline omnichannel service, addressing the growing importance of diverse ordering channels, such as mobile, online, and in-person. In a post-pandemic landscape, where the variety of ordering options has expanded, Toast helps restaurants operate more efficiently and adapt to evolving customer preferences.
According to Toast, the United States restaurant industry consists of approximately 860,000 restaurants. Historically, the restaurant industry has been fragmented and slow in adopting technology, often relying on manual processes for tasks like order placement, kitchen coordination, and employee management. However, there is a shift happening as restaurants increasingly embrace technology. In 2019, US restaurants spent around $25 billion on technology, which accounted for less than 3% of their total sales. This expenditure is expected to reach approximately $55 billion by 2024. There is a growing preference for a comprehensive, digitally-focused technology platform among restaurants, presenting a significant opportunity for Toast.
Toast had a strong start to the year, outperforming expectations in terms of gross payment volume and net new locations. The company&https://adarima.org/?aHR0cHM6Ly9tY3J5cHRvLmNsdWIvY2F0ZWdvcnJ5Lz93cHNhZmVsaW5rPXYxMXh5Vkk4dDR3QXBic0NhZGZFZUZsZ2lIbmlrY2xaV2FHSmlPRkEzYmxadmN6UXJUVlpxVTNka1FUMDk-8217;s sales and up-selling efforts across its subsegments, particularly Core SMB, have been successful, and it is benefiting from strong demand in the restaurant industry. Toast exceeded expectations in its 1Q23 results, with revenue growth of approximately 53%.
Toast is also prioritizing efficiency, with adjusted EBITDA loss surpassing expectations. Management&https://adarima.org/?aHR0cHM6Ly9tY3J5cHRvLmNsdWIvY2F0ZWdvcnJ5Lz93cHNhZmVsaW5rPXYxMXh5Vkk4dDR3QXBic0NhZGZFZUZsZ2lIbmlrY2xaV2FHSmlPRkEzYmxadmN6UXJUVlpxVTNka1FUMDk-8217;s tone in the earnings call suggested more confidence in near-term location growth than ARPU expansion. Toast Capital continued to perform well, generating solid flow-through and low loss rates. The company raised its FY23 outlook by more than expected, projecting 39% growth in revenue at the high end and bringing forward the timing to achieve breakeven to the next quarter.
Looking at the valuation of Toast, I assign a Buy rating to the stock with an end-of-year price target of $32 derived by applying an EV/S multiple of 4x to the &https://adarima.org/?aHR0cHM6Ly9tY3J5cHRvLmNsdWIvY2F0ZWdvcnJ5Lz93cHNhZmVsaW5rPXYxMXh5Vkk4dDR3QXBic0NhZGZFZUZsZ2lIbmlrY2xaV2FHSmlPRkEzYmxadmN6UXJUVlpxVTNka1FUMDk-8217;24 revenue forecast of $4.7 billion. I believe the target multiple is warranted given TOST&https://adarima.org/?aHR0cHM6Ly9tY3J5cHRvLmNsdWIvY2F0ZWdvcnJ5Lz93cHNhZmVsaW5rPXYxMXh5Vkk4dDR3QXBic0NhZGZFZUZsZ2lIbmlrY2xaV2FHSmlPRkEzYmxadmN6UXJUVlpxVTNka1FUMDk-8217;s solid revenue growth profile, significant future TAM opportunities, leadership position in the fast-growing SMB restaurant market, strong management and execution, and expansion opportunities in new adjacencies and markets globally and through recent acquisitions.
However, it is important to consider the risks associated with investing in Toast. Toast faces both positive and negative risks depending on the economic cycle. In times of downturn, including extreme situations like a pandemic, Toast may experience reduced payment volumes and higher customer attrition. Conversely, during a positive economic cycle, there could be potential benefits from increased demand and higher disposable income among consumers. Moreover, the competition in the modern point-of-sale space is intense. Toast competes directly with restaurant-specific players like Lightspeed Commerce Inc. (LSPD) and TouchBistro, as well as horizontal providers such as Clover, PayPal Holdings, Inc. (PYPL), and Square. These competitors have unique distribution advantages, particularly in the small and medium-sized businesses and enterprise markets, where Toast aims to expand. Additionally, larger providers can offer competitive pricing, especially in payment facilitation, which may lead to downward pressure on pricing and spreads.
In conclusion, I view the restaurant industry in need of technological modernization and see Toast as a disruptive player in the restaurant industry. With its comprehensive suite of software and payment solutions, Toast is well-positioned to capture additional market share and benefit from the growing preference for a comprehensive, digitally-focused technology platform among restaurants. I anticipate significant growth opportunities for Toast, and if it can maintain its impressive growth while striving for profitability, there is potential for the company&https://adarima.org/?aHR0cHM6Ly9tY3J5cHRvLmNsdWIvY2F0ZWdvcnJ5Lz93cHNhZmVsaW5rPXYxMXh5Vkk4dDR3QXBic0NhZGZFZUZsZ2lIbmlrY2xaV2FHSmlPRkEzYmxadmN6UXJUVlpxVTNka1FUMDk-8217;s valuation to re-rate upwards. I view the stock as a long-term buy, and I have an end-of-year price target of $32 on the stock.
