What happened
Shares of restaurant-technology company Toast (TOST 0.22%) dropped like a rock on Thursday after the company reported financial results for the fourth quarter of 2022 that underwhelmed Wall Street. As of 11 a.m. ET, Toast stock was down 19%, but it had been down about 25% earlier in the session.
So what
For Q4, Toast's management had guided for revenue of $760 million at most. In Q4, Toast exceeded this guidance with quarterly revenue of $769 million, a 50% year-over-year increase. Moreover, annualized recurring revenue reached $901 million, with faster growth of 59%.
Considering that Toast's revenue was strong, it seems that bottom-line results are the reason the stock dropped so much today. In the previous quarter, management had guided for at least a $20 million loss according to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Therefore, its adjusted EBITDA loss of only $18 million was better than guidance.
Wall Street appears to have been looking at nonadjusted profitability metrics and had expected a loss of only $0.14 per share. However, Toast lost a heftier $0.19 per share, and this appears to be a primary reason the stock is down today.
Now what
On one hand, the market appears to be overreacting to Toast's financial results today, especially considering that revenue was ahead of expectations. But the other thing investors might be thinking about is the company's slowing growth. In 2022, revenue was up 60% year over year. For 2023, however, management is only guiding for 34% growth.
Trading at just 4 times its sales after today's sell-off, Toast stock actually looks reasonably valued to me, because its revenue growth of 34% is still quite good. Longer term, however, it's fair to wonder how much management can improve the company's profits and cash flows -- it's projecting ongoing losses in 2023. But if it can eventually turn those metrics positive, then this could actually be a good buy today.
