Toast Inc. (NYSE:TOST) is a $13 billion market cap payment solutions company that is tailored toward restaurants of any size, with the vast majority of its presence coming from the United States.
With more than a billion dollars in annual revenue, Toast also offers software solutions to these restaurants and capital financing via Toast Capital, where clients can obtain loans directly and have accumulated approximately $1 billion in loan originations. This is done at a lower credit risk as Toast Capital can leverage customers' sales data to predict repayments.
In September 2021, the company went public at an ideal moment when fintech valuations were at their peak, and Toast hit a level of up to $36 billion in market cap. From there, the drop was significant and in June of 2022, the stock was down more than 80%. Nonetheless, the stock has had an extraordinary performance in 2024, obtaining roughly 32.60% in appreciation and sitting above the $20 mark.
Currently, Toast is an unprofitable business and sits in the growth stage of the business cycle. This analysis will dive into its expansion, top-line performance and valuation to determine whether the company is worth your attention.
TAM and growth opportunity Based on the National Restaurant Association, the industry will accumulate $1 trillion in sales in 2024 for the first time, representing approximately 4% of the U.S. gross domestic product and a 5 times expansion over the last 30 years. In this gigantic total addressable market, Toast is positioned to offer payments and software solutions to the 875,000 restaurants that exist in the U.S. based on the company's estimates. Out of those, Toast is estimated to hold 13% of the U.S. restaurant market share within its offered solutions.
Toast's core business is its payments acceptance unit, which as of the first quarter of 2024 contributed 81% of the revenue. Nonetheless, the point-of-sale business' competitive landscape is significantly fragmented. There, the company competes with names such as Block's (NYSE:SQ) Square (NYSE:SQ), Fiserv's (NYSE:NYSE:FI) Clover, Shopify (NYSE:TSX:SHOP), Shift4's (NYSE:FOUR) SkyTab, Lightspeed (NYSE:TSX:LSPD), TouchBistro and many more. Nonetheless, some of those competitors offer POS solutions not only to restaurants, but also to any other type of business.
What allows Toast to exhibit impressive financial growth rates despite the competition is its product offering that is tailored predominantly to restaurants in combination with other software solutions that are essential to running a business and could be bundled in their core payment solutions. For example, these could be things such as inventory management, online ordering, email marketing, self-ordering kiosks, table reserving, staff scheduling, payroll and even cost analytics software. With this, Toast lets restaurant owners simplify their technological supplier base and stick to a single provider, making things easier for them.
Not so long ago, Toast decided to extend its TAM by doing two things.
Top-line growthToast's top-line growth speaks for itself. When going public in 2021, the company registered second-quarter trailing revenue of $1.18 billion. Now, almost three years later, that amount has more than tripled to $4.12 billion. Although annualized revenue growth rates have indeed decelerated, in the first quarter, it still sat elevated at 31.05%, confirming the ongoing market share it is taking in the payments industry.
While the revenue generation source of Toast is predominantly driven by payment volume, scaling the subscription services segment allows for more room to decrease top-line volatility. That is why the company includes annualized recurring run-rate as one of its key business metrics in its filings.
(Dollars in millions) TTM Q1 21TTM Q1 22TTM Q1 23TTM Q1 24| Annualized Recurring Run-Rate (ARR) | 384 | 637 | 987 | 1305 |
Within the ARR key performance indicator, the company's growth continues and has been similar to revenue growth as a whole. For example, the last reported ARR was $1.30 billion, representing roughly 240% growth from three years ago when the ARR was $384 million. At the same time, in the first quarter of 2022, 2023 and 2024, the subscription services segment (which represents most of the ARR) was the fastest-growing segment in all those periods. The last figure reported showed a sensational 41% growth from the previous year.
Moving on, year-end revenue is expected to be $4.89 billion in 2024 and $6.02 billion in 2025. In 2023, Toast grew its revenue by approximately 42%, so the forecasted amounts imply a growth contraction to 27% in 2024 and 23% in 2025. Nonetheless, GAAP earnings per share is expected to move above the zero line for the first time in fiscal 2025.
The stock is modestly undervaluedWhen dealing with companies in the growth stage that are not profitable, price-sales is perhaps the proper multiple to use.
In this respect, Toast has a price-sales ratio of 3.32, which is inferior to its history but much higher than the industry median of 2.27. Nonetheless, this could be justified with the fast revenue growth of 31.05%. At the same time, the enterprise value-to-revenue ratio displays similar outcomes, predominantly due to the small net debt composition in its balance sheet, making the market cap and enterprise value similar.
Finally, the GF Value Line suggests an intrinsic value of $28.26, which implies a modestly undervalued status and an upside potential of approximately 16% based on a share price of $24.37.
TakeawayConsidering the remarkable financial growth, increase in its total addressable market and a valuation that looks cheap based on its history and GF Value Line, Toast is a stock that is worth your attention and is tilted toward a bullish sentiment.
Nonetheless, over the past year, insider trades have all been sales, including trades from the president, CEO and chief financial officer. Currently, insider ownership is 13.32% and the net sales over the last 12 months of $41.6 million represent a minor portion of the market cap, totaling less than 0.50%, meaning the sales were not material.