The initial public offering (IPO) class of 2021 has had a rough time on the markets. Shares of many 2021 IPOs are down more than 40%, 50%, or even 60% from the prices they went public at. Olo (OLO 0.64%) and Toast (TOST 2.45%) are no exceptions, falling 74% and 67% from their IPO dates, respectively.

That said, both are thriving in the restaurant software industry. Toast and Olo are rivals in this space, with Olo providing back-end software tools to optimize digital ordering and Toast covering all of a restaurant's digital applications, from point-of-sale services to payroll. So which one looks like the better buy for investors looking to take a bite out of this industry? Let's find out.

The case for Olo

Olo focuses on one specific pain point for restaurants: digital ordering. Many restaurants lack the technological infrastructure to scale digital ordering operations, which might leave a bad taste in patrons' mouths. Olo simplifies this, and it also provides digital solutions for any mode of ordering, from drive-thru to delivery.

The company has seen impressive adoption, with 600 brands and 82,000 locations using Olo's tools. The company's top-line growth is also nothing to shake a stick at. Olo has a revenue compound annual growth rate (CAGR) of 67% from 2018 to 2021, and a location CAGR of 31% over the same period.

One possible reason Olo has seen such astounding success is because of its unique sales strategy. It targets enterprises and sells its services at the corporate level. Once it gets headquarters on board, the other locations follow suit (at little or no cost to Olo). This strategy has resulted in relatively low sales spending: In Q2 2022, only 20% of Olo's revenue was spent on marketing, much lower than the 38% spent on research and development.

Olo's marketing spending is low, but it isn't low enough to achieve profitability. Over the trailing 12 months, the company has lost over $36 million, representing a loss margin of 22%. Olo also sports negative free cash flow: The company's cash burn over the trailing 12 months was $6.8 million. That said, it has almost $387 million in cash on its balance sheet. This should allow Olo to burn cash for a while before it becomes an issue.

With its high growth and fast adoption, Olo's unique sales model seems to be paying off. Additionally, the company's multi-channel offering could allow restaurant chains to quickly increase their usage of Olo's services, suggesting the company could expand through both new and existing chains.

That said, Toast has a similar offering, and the company's wider product suite might be a reason for Toast to rise above Olo.

The case for Toast

While Olo focuses primarily on ordering food, Toast's toolkit is much more comprehensive. Not only does Toast provide point-of-sale products, but it essentially offers everything a restaurant may need, from payroll management services to capital loans to online ordering. That gives the company two advantages: There's more room for a restaurant to expand its usage of Toast, and it creates high switching costs. 

That said, Toast still has a smaller scale than Olo in terms of total locations, with 68,000 as of Q2 2022. However, these restaurants are relying on Toast more -- it generated $675 million in Q2 revenue, a jump of 58% year-over-year. That's significantly higher than the $45.6 million Olo generated in the same period.

Like Olo, Toast isn't profitable. The company sported a gross margin of just 16%, which has been falling since it went public. Therefore, Toast lost $54 million and burned $30 million in free cash flow in Q2.

The better buy?

While it has been developing slower than its counterpart and is much smaller when looking at revenue, Olo looks like the better buy today. The company leads in terms of scale, and its highly efficient sales strategy looks like it will keep the company in first place. Additionally, while both companies are unprofitable, Olo seems to have more room to run, giving it more time before it should turn profitable. 

And that's leaving aside valuation. While Toast is cheaper on a price-to-sales basis, price-to-gross profit is likely the better metric to value these businesses on. On that front, Olo is more reasonable at 10 times gross profit, versus Toast's valuation of 26 times.

With its unique sales strategy and larger potential ahead, Olo looks like the better company to hold for the long term.