Here's What Investors Should Know About Toast Stock

Toast (TOST 1.38%) has been in business for nearly a decade and just became publicly traded in late 2021. In this segment of Backstage Pass, recorded on Dec. 13, Fool contributor Danny Vena explains the company's core business model and recent financial performance. 

Danny Vena: I'm going to start off by -- the company I'm going to talk about is one that intrigues me a little bit. That is a company called Toast, ticker T-O-S-T. For those who may not yet be familiar with Toast. This is not what I was trying to do. Trying to get to the present button here and hit the wrong one. Toast is a company that has created a cloud-based system for the restaurant industry.

If you've ever worked in a restaurant, you probably are aware that they have one software system for scheduling their employees. They have another software system for ordering items for inventory.

They have another system for digital ordering from customers. They have another system if they -- for marketing or for team management. Any restaurant really has a cluster of different softwares that they have to deal with, and none of them talk to each other. That's where Toast comes in. Toast has created this cloud-based software system that really handles all of the disparate parts of the restaurant industry.

It handles guest orders and payment processing and coordinating kitchen and operations and managing employees. It can also do marketing and loyalty and team management. This is really an opportunity to grow within the restaurant industry.

Another thing that's interesting about it is that it integrates with companies like DoorDash that handle the food delivery for them, these restaurants. Now, one of the things that I found really compelling about this is by the time they went IPO, which was just back in September, Toast had become the leading platform serving the restaurant industry.

Yet, it only serves about 6% of the more than 860,000 restaurants in the United States. That gives you an idea of just how fragmented the market is. I want to look at a couple of the metrics here. Now, I want you to notice: Look how far down Toast has gone since its IPO.

Really doesn't appear to be doing that well, and if you base your investment decision on the stock price, you'd go: "Look how far that stock is down. I'm certainly not investing in that." But if you look at their revenue growth, revenue is up a 105% year over year in the third quarter. Annual recurring revenue, $544 million, up 77%. Gross profit, $83 million, up 72%. So it looks like all of the financial metrics are headed in the right direction.

Now of course, you get to a company that is a software-as-a-service platform, net loss $253 million. Not surprising that a software-as-a-service business is not yet profitable.

Now the company is currently serving roughly 48,000 restaurant locations, and 56% of those locations are using four or more of their products. They start off with the Toast payment processing system. That's really what put this on my radar.

My wife and I went to Comic-Con here a couple of weekends back. And it seemed like every restaurant that we went to when they would bring over the payment device, I saw Toast at the bottom of it. And it happened more times than not. Probably, I would say, five out of six times that we were at a restaurant, they were using the Toast operating systems. So that really piqued my interest.

They use the payment processing is example of one of the segments. But then if you want to use the back-office part of it for scheduling your employees, that's another piece of the product.

If you want to use it to control your inventory, that's another piece of the product. There are many different segments that restaurant owners can choose from, and they are getting the foot in the door with the payment processing.