It doesn't seem right. Toast (TOST 1.92%) has had a monster year. It has boosted its guidance following all three quarters this year. The popularity of its platform -- a point-of-sale cloud-based solution for restaurants that does so much more behind the scenes -- is booming. It was one of the leaders in Thursday's market rally, but the closing price of $20 finds it trading for exactly half of its $40 IPO less than 14 months ago.
There are some cruel lessons here. Sometimes a steady drum of beat-and-raise quarters doesn't snare the market. Sometimes the acceptable valuations for high-growth but profitless speedsters contract. Sometimes a company can do nearly everything right and still fail to impress investors.
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Waiter, there's a flywheel in my soup
Toast is a broken IPO, but by most accounts that shouldn't be the case. It's a thriving platform that has seen its client base grow 40% to 74,000 locations over the past year. If you visit restaurants even infrequently to dine in or pick up some takeout, there's a good chance that you settled up your bill through a Toast card reader.
If you're on the hungry end of this transaction, that would seem to be it. You pay, you go. However, for the growing number of restaurateurs on the Toast ecosystem, it's a one-stop shop to help them stay afloat in a cutthroat industry. Toast can manage inventory, payroll, third-party delivery apps, and even loyalty programs to keep customers engaged the next time their tummies start to grumble.
Like most software-as-a-service (SaaS) enterprise solutions, the key to success is getting your foot in the door and then jamming through as many appendages (or modules, if you will) in the process. It just rolled out an invoicing module to help its customers manage catering and wholesale orders.
A restaurant operator doesn't have to expand its relationship with Toast beyond the point-of-sale Trojan horse, but it certainly makes life a lot easier for both parties when that happens. If you think a 40% surge over the past 12 months in locations is impressive, most of the other growth metrics are growing even faster. Annual recurring revenue, gross payment volume, and ultimately revenue are up 60%, 53%, and 55%, respectively, over the past year.
The $752 million that Toast served up in third-quarter revenue on Thursday afternoon was comfortably ahead of the $700 million to $730 million it was targeting on the top line just three months ago. We've seen a lot of consumer-facing businesses stumble since their summertime forecasts as the economy got iffy. Toast obviously wasn't one of them.
The bottom line isn't as kind right now, but Toast did score another relative victory here. Gross profit and adjusted gross profit soared 82% and 78%, respectively, in the third quarter. Adjusted EBITDA was a negative $19 million, but that was much better than the $30 million to $40 million deficit it was modeling for the quarter back in August.
Raising the Toast
This year has been a three-course meal of deliciousness. Toast has raised its full-year guidance in each of fiscal 2022's first three quarters. This year kicked off with a top-line outlook of $2.349 billion to $2.409 billion. We're now at $2.692 billion to $2.722 billion. Its initial read calling for a $200 million to $240 million deficit on its adjusted EBITDA in 2022 has been whittled down to a more manageable hole of $117 million to $127 million.
You would expect this baker's dozen approach to setting expectations would be rewarded by the market, but that hasn't been the case. Even after Thursday's pre-earnings pop, Toast stock is down 42% in 2022. It's down a blistering 71% from the all-time high it hit last November.
One can argue that Toast is a bellwether for restaurant stocks, and this is an industry suffering from the inflationary and recessionary concerns that are keeping a lot of investors up at night. Sure, but higher menu prices only help Toast since it gets a piece of what is now more than $100 billion in annualized gross payment volume going through its platform.
Recessionary fears will only drive its accounts to think outside the box. Restaurant operators will become more aggressive with Toast marketing and loyalty programs to drive traffic, as well as catering, wholesale, and delivery app solutions to generate incremental revenue.
Getting Toast for half of last year's IPO price is tempting. It's just a dinner bell that Wall Street isn't hearing.
