Toast (TOST 3.19%) is a software-as-a-service (SaaS) company. Its platform helps restauranteurs manage virtually every aspect of their businesses, from point of sale to marketing. Prior to its September initial public offering (IPO), Toast generated quite a bit of buzz among investors, but the stock currently sits 35% below its all-time high. Is it time to buy the dip?
In this Backstage Pass video, recorded on Nov. 29, Motley Fool.com contributors Danny Vena and Travis Hoium (who happens to be a Toast customer) share their thoughts on the company.
Danny Vena: One of the things that I noticed when I was looking at it is -- there were two metrics, I guess, that stood out to me. One was just actually the claim that they are the largest in terms of use by restaurants. They are the largest provider of these services to restaurants. I thought, "wow, that's pretty good, right out of the gate."
Then the number for that is they serve 6% of restaurant locations in the United States. That talks to how fragmented the market is. Do you see that as a much larger opportunity for them to consolidate this fragmented market?
Travis Hoium: That's the opportunity for them. What I'm really interested in, especially since their third-quarter numbers came out, you look at their growth rate of over a 100% -- now there's a couple of things that are happening there -- they're both adding restaurants and they are expanding the revenue opportunity they have in restaurants. You talked about those services that they're adding or modules. There's two growth angles there. I don't know how consolidated that can be. The restaurant industry is so fragmented that I don't think there's any way that any company is going to have over, let's say, 30% market share. But they can still double, triple their business and still stay siloed in that restaurant business.
The other thing to keep in mind too, in this segment is it's extremely competitive. Square has introduced some restaurant features that have really improved their offering in that market just in the last year. That's another company to watch there. There's always companies popping up in this market and then they're always seem to find some little niche, because the services that a coffee shop needs are different than the services that a full-service restaurant needs, is different than a top golf. This is why it's fragmented because there's such specialization that goes into the market. That will be the question, can they add enough features without diluting the overall value to capture more of the market than I think they can. I'm taking a guess at that 30% number. But it seems like there's always be fragmentation and there's always going to be restaurants too that are just still run on paper [laughs].
Danny Vena: I've actually been to some of those restaurants and it's pretty interesting with all the technology available. See waitstaff running around with the pad and writing the number down.
Travis Hoium: Exactly.
Danny Vena: It is interesting. That sounds like a good spot right here to go ahead and share my screen again and bring up, actually, I need to get back to the presentation first, I think, and share my screen. Here we go.
This is the most recent information from Toast. In the third quarter, their revenue of $486 million was up 105% year-over-year. Now, a lot of that probably has to do with the fact that in the third quarter of last year, there were a lot of things that were shut down as a result of the pandemic. Restaurants were probably not considering adopting new operating systems for their back-end software.
Annual recurring revenue of $544 million, up 77% year-over-year. Gross payment volume, $16.5 billion, up 123%. That's some of the triple-digit growth that Travis was alluding to. Their gross profit was $83 million, up 72%. The company is not profitable and actually their losses expanded exponentially in this quarter. But the fact that they went public, September 15th, that means that a lot of their IPO-related expenses were dropped into the third quarter. I didn't throw the number up there because it's meaningless at this point -- which is also one of the reasons why you want to watch a company for a few quarters, so they can wash those IPO expenses through their financial statements. You can get a better look at what's going on.
As I mentioned earlier, 56% of locations used four or more of the modules. That's in addition to the payment processing, which is the base module that Travis was talking about.
Now, management says their total addressable market is about $55 billion in the US. Globally, they think that's twice as large. They currently have over 48,000 locations using its platform. As of the June quarter, that was up 45%, during the trailing 12-month period. It was up 67% in the year before. One of the analysts asked management on the call what that number had grown to, and they said, we're not really going to focus on that on a quarter-by-quarter basis, but we are going to maybe supply that once a year.
Again, as I mentioned, 6% of restaurant locations in the U.S., but the largest provider at this point. I think that is interesting. Whenever I see massive adoption like that happening over a short period of time, it makes my ears perk up a little bit. Any other thoughts on Toast before we move?
Travis Hoium: Yeah, couple of things for perspective, that I want to just point out. Square did $41.7 billion in gross payment volume last quarter, Toast did $16.5 billion. If you're looking at those two companies, Toast is almost half the gross payment volume of a company like Square which is far better known. They're really growing quickly in this restaurant space, and that comes through a lot of revenue. Their market cap is only about $20 billion compared to $100 billion for Square. Now they don't have the cash app and Bitcoin and all that [laughs] other stuff going on, which is maybe an advantage. But bigger company than you might think if you're just hearing about them now.
Danny Vena: I guess it depends on your focus as an investor. But in my experience, some of the companies that can remain laser-focused on a particular niche, they can really carve out a successful business with that focus, say Netflix. They stayed laser-focused on that niche and were able to beat out some competitors that had really deep pockets. Don't get me wrong, I'm square shareholder. But I think that toast is something that I'm intrigued about. I will probably be following a little more closely and definitely considering maybe in the next quarter or so investing in there.
