Toast surged on its market debut but is this cloud-based technology platform providing solutions to the restaurant industry a good buy?
Sept. 27, 2021
Toast (NYSE: TOST) is an end-to-end technology platform built specifically for the restaurant industry and was founded in 2012. The company provides payment solutions, order and delivery, payroll solutions, and more. It has a mission “to empower the restaurant community to delight their guests, do what they love, and thrive”.
After a tough 2020 where restaurant sales declined by 80% in the majority of cities, negatively impacting Toast, which was forced to cut its workforce in half to maintain the health of the company. Despite these recent challenges, things have been looking up with sales rebounding but is it a good investment today?
The bull case for Toast:
The restaurant industry has not adopted technology and has one of the lowest digitization rates across all industries. It still relies heavily on manual processes for taking orders, coordinating kitchen operations, managing employees, among other tasks. Many that have adopted technology solutions in restaurants have found them to be inadequate and not suited to the complexity of the restaurant industry. Toast aims to address these pain points and provide solutions tailored to the restaurant industry’s needs.
The company generates revenue through four avenues, subscription services, financial technology, hardware, and professional services. Despite a tough 2020, the company posted revenue growth of 24%, and growth accelerated to 105% in the first six months of 2021, with revenue reaching $704 million. Its highly predictable annual recurring revenue also surged by 118% period-over-period for the first six months of 2021.
Toast provides its solutions to roughly 48,000 restaurant locations across the U.S., and these have become an essential part of its customers’ business. The company has also demonstrated its ability to introduce new product offerings. This has led to an impressive net retention rate of greater than 110% since 2015, demonstrating the stickiness of its solutions.
The company believes that it is in the early stages as it attempts to gain market share as it currently has approximately 6% of the restaurant locations in the U.S. on its books. Furthermore, its current annual recurring revenue run rate was only 3% of its near-term market opportunity, which it estimates to be $15 billion. The company also plans to expand globally, significantly increasing its total addressable market to $115 billion due to the 22 million restaurants worldwide. This leaves a large runway for growth provided the company can execute and should drive shareholder returns.
Toast is led by CEO Chris Comparato, who joined the company in 2015 and has a 94% approval rating on Glassdoor, with the company scoring 4.2 out of 5 stars. All three founding members remain and work as the President, COO, and CTO. These members own roughly 15% of the business, which aligns its values with shareholders. The founders also control the company due to the class of shares they own.
The bear case for Toast:
It is also operating at a loss that totaled $248 million in 2020, which is not unusual for a company in growth mode but is something investors should keep an eye on. The company’s valuation may cause concern with the company being valued at $8 billion in a secondary share sale in November 2020, compared to its current valuation of roughly $27 billion today.
Although there is a huge upside if it can expand internationally, it also creates a significant execution risk. Toast currently has not made any investments in this and has little to no experience with customers outside of North America.
Lastly, a further impact or slow down in the restaurant industry as a whole due to COVID-19 or increasing labor costs could have an adverse impact on the company.
So, should I buy Toast stock?:
Despite the promise that Toast demonstrates, there are many risks, such as the current valuation, execution risks, and more. In addition, at MyWallSt, we prefer to wait two quarters before investing to see how the company fares on the public markets. Toast is an exciting company with a lot to like but is perhaps more suited to being put on a watchlist.
Quickfire round:
When did Toast go public?
Toast went public on the NYSE Tuesday, 21st of September, 2021.
Who founded Toast?
Toast was founded by Steve Fredette, Aman Narang, and Jonathan Grimm, who previously worked together at Endeca, which was sold to Oracle.
Does Toast pay a dividend?
No, nor does it intend to in the foreseeable future.
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