The pandemic hit the U.S. restaurant industry hard. For chains and small business owners alike, sales still remain well-off pre-pandemic highs. Eating out has changed, and restaurants are in need of new solutions to make ends meet.
That's why restaurant technology stocks have the potential to be great investments. Olo (OLO -3.51%), Toast (TOST 0.47%), and Block (SQ -0.51%) are three to keep an eye on in 2022. Here's why.
Digital services drive restaurant success
Restaurants tend to have low profit margins because of the industry's competitive landscape and high costs of food, labor, and rent. In theory, technology can help lower costs for these businesses and expand their customer base, but many tech offerings in the restaurant industry take a large percentage of each sale, leaving few leftovers -- if any -- for the actual eatery.
Rather than take a big bite of each sale, Olo has built an impressive subscription platform spanning all customer touchpoints, from dining room to delivery. Structured primarily as a software-as-a-service (SaaS) business model, Olo breaks its software modules into two basic categories: online ordering and delivery. It also just launched a digital payments service (which is not SaaS), which could contribute heftily to Olo's profitability.
Olo's online ordering gives a restaurant the ability to maintain its brand image and manage client relationships. Rather than have a restaurant list its menu and ordering features on a third-party site, Olo integrates within a company's own app or website. Digital ordering capabilities extend into the physical dining room as well, integrating directly with point-of-sale (POS) systems, self-serve kiosks, and order queue management. When it comes to delivery, Olo helps restaurants provide flexible fulfillment by syncing up with on-demand drivers from various sources for more affordable delivery fees.
Still, Olo's stock price has slumped alongside other high-growth stocks, dropping more than 60% since its spring 2021 IPO. With free cash flow of $14.4 million last year, Olo's profitability is small but workable. Plus, the company expects to grow sales at least 30% in 2022, and is armed with $514 million in cash and equivalents and no debt. Be sure to keep Olo on your radar as a top restaurant industry software partner.
The modern restaurant "operating system"
While many businesses have yet to recapture all pre-pandemic sales, tech provider Toast has reported that restaurants on its platform grew sales by 41% year over year in 2021. In fact, Toast customers did more business in 2021 than they did before the pandemic: sales in the fourth quarter of 2021 were 6% higher on average than in the same quarter of 2019.
Toast attributes this recovery to technology that supports a hybrid dining model, blending sit-down and takeout experiences. Toast's POS hardware provides no- or low-contact dining experiences. What's more, POS and mobile ordering devices improve productivity for restaurant employees, helping guests get their food faster.
Toast sells its POS and mobile ordering hardware below cost, but the company's recurring software revenue and digital payments are the real cash cows. The company's "financial technology solutions" revenue more than doubled in 2021, and highly profitable subscription services were up 67%. Toast expects to grow revenue in the high-30% range in 2022 as its payments and management software picks up more users.
Much like Olo, Toast stock has gone cold since its IPO in September 2021. Today, the stock is down nearly 70% since its debut. Last year's paltry free cash flow of negative $17 million likely scared off investors. But this small restaurant technology company has $1.27 billion in cash and short-term investments, and with no debt, Toast has plenty of capacity to promote its platform's expansion. If Toast can continue its growth story, investors may soon be lining up to get a taste of this top stock.
The intersection of digital sales, consumer engagement, and financial reports
All said, I'm personally not ready to pull the trigger on Olo or Toast. But it's a different story with Block (formerly Square). The digital payments and fintech powerhouse grew gross profit (which mostly excludes results from the company's Bitcoin (BTC 0.22%) trading services) at a 62% rate last year to $4.4 billion. This growth is especially impressive considering that Block already processes tens of billions of dollars in transactions every quarter. The company is still spending heavily to promote expansion, but turned an unadjusted net profit of $166 million in 2021.
Like Olo and Toast, Block has taken a beating in recent months, down 55% from its all-time high. But Block is a key partner for food and beverage businesses of all sizes. In addition to digital payment services, the Block merchant ecosystem offers restaurant owners a variety of tools: customer rewards, financial reporting software, integration with other tech providers, and menu, website, and online ordering management.
Notably, Block brings in very little revenue outside of North America. If the company can replicate its success internationally (both with Square for merchants and Cash App for consumers), Block could have an incredibly long runway of growth ahead.
Block's work on the Bitcoin network could also be an important long-term development for restaurant owners and other small businesses. Digital payments take sizable profits from a small operation's bottom line. If Block can crack the code on using Bitcoin as a payments network, or simply help facilitate Bitcoin as an option for daily online business transactions, it could reduce costs and speed up payment settlement times for restaurants -- and other businesses.
Even after the recent tech sell-off, Block stock isn't cheap. But the company has incredible momentum and a well-developed ecosystem of digital tools to help restaurants and bars make their way in the digital era. I'm a buyer right now, and am hungry to see what Block does next.