They say necessity is the mother of invention. That’s not always the case — but the point is well taken. Take Toast (TOST) as an example. Restaurants don’t absolutely need its software to manage their complicated businesses. However, the tools it provides can certainly help them — and many are recognizing this fact. That’s why Toast’s top line is expected to continue its growth streak this year with a 25% improvement.
So if the company’s software is so great, then why is the stock down 65% from its 2021 peak? For a reason veteran investors have seen before. In fact, that reason is also why many of these veteran investors are eyeing this weakness as a buying opportunity — Toast is facing a temporary headwind.
Toast, up close and personal
Managing a restaurant can be a major headache because there are so many moving parts. Kitchens, people, supplies, food (with expiration dates, by the way) payment processing, inspections, payroll, advertising, etc. It’s a lot.
Toast makes it easier to get a handle on all of the details. Although it’s often categorized as a point-of-sale solution, Toast is so much more. It helps restaurant managers take food orders, process payments, schedule and pay workers, cultivate a customer list, make kitchens more efficient, and even handle online orders — all from a single, integrated platform. More than 100,000 restaurants now rely on Toast’s turnkey system.
But the question remains: Why is the stock down so much?
Toast has been around since 2011. But as you can imagine, the COVID-19 pandemic helped put it on the map. Restaurants were forced to meet a swell of demand from consumers who were suddenly ordering food online and looking for contactless ways to retrieve and pay for it. End result? Its top line soared from $823 million in 2020 to $1.7 billion in 2021. Its sales have doubled again since then.
Like many other companies, Toast used the unique circumstances of the pandemic to raise funds — it went public in September 2021. Its newly issued shares experienced a few bullish nibbles shortly thereafter. By the time 2021 was turning into 2022 though, the health crisis phase was winding down. People were getting out again, and losing interest.
They were particularly losing interest in stocks that were priced richly like Toast shares were. In retrospect, its big pullback isn’t all that surprising. The sellers, however, have arguably overshot their target.
The bullish arguments for owning Toast stock
Don’t misread the message. Toast shares are still expensive. The company is also still unprofitable, which makes it more difficult to meaningfully value the stock. To the extent one can make quantitative and qualitative judgment calls on Toast, however, there’s a strong bullish case to be made.
Chief among the bullish arguments is revenue growth — past and projected — that’s pushing the company toward profitability. While Toast will likely remain in the red this year, analysts expect it to swing to a profit of $0.11 per share next year. Then the party really starts.
DATA SOURCE: STOCKANALYSIS.COM. CHART BY AUTHOR.
Then there’s Toast’s competitive edge in a big and quickly changing restaurant arena. Other companies do provide cloud-based software that works for the restaurant business, for the record. PayPal and Block are a couple of the more familiar names with restaurant-oriented offerings.
Neither of these industry giants’ platforms are built from the ground up to serve restaurateurs, though. Toast’s is. It’s conceivable that it would be the only management tool a restaurant would need to utilize since its integrated platform can handle everything from customer payments to inventory management to payroll to ordering. And as restaurant owners can attest, anything that makes their job simpler and faster is worth paying for these days.
And there are plenty of opportunities for more growth. While Toast already boasts 106,000 customers, that’s only a fraction of the roughly 700,000 restaurants running in the United States alone. And that’s just in the U.S. — Toast isn’t limited by borders.
Certainly not all of these restaurants and locations will become Toast customers. After all, bigger chains like McDonald’s prefer to custom-build their own point-of-sale solutions than purchase them off the shelf. On the other hand, the National Restaurant Association reports that 7 out of every 10 restaurants in the United States are single-unit operations.
These restaurateurs don’t have the ability to develop their own software. They’re looking for something like Toast’s turnkey solutions. Now that such platforms are available as well as affordable, research outfit Spherical Insights believes the worldwide restaurant point-of-sale market is set to grow at an average rate of nearly 10% per year through 2032. That outlook jibes with a similar forecast from Global Market Insights.
Toast is well-positioned to capture more than its fair share of this growth.
Just keep it in perspective
It’s a compelling prospect, to be sure. Toast is in the right place at the right time with the right product. And, while its shares are down 65% from their 2021 post-IPO peak, they’ve not actually lost any (net) ground since early 2022. That’s a subtle hint that would-be buyers may be waiting in the wings for the stock to start making sustained bullish progress before jumping in.
You likely know how that goes, though — once any rally is underway, investors on the sidelines are already at a disadvantage. The best time to act is before most other investors begin to connect the dots. Just don’t go overboard. While this stock offers above-average reward potential, it also comes with above-average risk and above-average volatility. Position yourself accordingly.
— James Brumley
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