As companies invest in digital transformation in an effort to generate data-driven insights and solutions, some aspects of the technology world receive less focus than others. One such area could be point-of-sale (POS) software, which is an extension of e-commerce. Point-of-sale systems are effectively modern-day cash registers.
POS devices allow consumers and merchants to quickly and efficiently complete transactions, as people rely more heavily on credit cards than cash. Big names in the POS space include Block and Oracle. However, a lesser-known company called Toast (TOST 4.70%) may be worth putting on your radar.
Toast has an origin story unlike any other
Silicon Valley is famous for a lot of reasons. Time and again investors read about start-ups founded in dorm rooms by technology wunderkind, eventually attracting the biggest names in the investment world. Before you know it, a 19-year-old is dropping out of school, has hundreds of millions of dollars of investment capital on the balance sheet, and has a vision to take the world by storm.
The story of Toast is, effectively, the opposite. An article by CNBC breaks down Toast's story beginning with its early days, where the company struggled to attract capital from traditional sources such as private equity or venture capital firms. A friend of the founder, who had previously sold his company to Oracle, stepped in and wrote Toast its first check. The problem? No one in Silicon Valley knew who this wealthy angel investor was, and therefore did not feel compelled to join.
In addition to the lack of high-caliber names on its cap table, Toast was not exactly creating something new. After all, POS systems already existed and the competitive landscape was quite crowded. If anything, the POS ecosystem was a bit fragmented, with each company possessing some unique application or niche.
Despite these barriers, Toast's founders persisted and built a better mousetrap. After a modest capital raise in 2015 from an angel investor, Toast began to scale quickly. By 2018, the company had raised hundreds of millions of dollars from some of Silicon Valley's most sought-after investment funds.
Image source: Getty Images.
How is the company performing?
Toast is considered a software-as-a-service (SaaS) business. While traditional financial metrics such as revenue, gross margin, and net income are important, SaaS businesses can also be measured by industry-specific key performance indicators such as annual recurring revenue (ARR), net revenue retention (NRR), and payback period.
Generally speaking, SaaS businesses contain recurring revenue from software and nonrecurring revenue in the form of professional services. Growth in software revenue tends to be scrutinized more heavily because it carries much higher margins than professional services. For this reason, SaaS companies tend to highlight growth in ARR.
Another important metric to study is net revenue retention. NRR measures ARR net of churn. If the ratio is above 100%, it implies that the company is outselling any churn it experiences. In addition, payback period is important because it quantifies how long it takes a company to break even on customer acquisition costs. Ideally, SaaS businesses would like to see this figure decrease over time.
The table below illustrates some of Toast's core SaaS metrics:
| Metric | 2020 | 2021 | 2022 |
|---|---|---|---|
| ARR (in millions) | $326 | $568 | $901 |
| NRR | 121% | 123% |
128% |
| Total locations | N/A | 57,000 |
79,000 |
Data source: Toast investor relations presentations.
Investors can see that Toast is doing a stellar job growing its ARR. This can primarily be attributed to the company's increased penetration of its addressable market, evidenced by its growing number of locations. Perhaps even more encouraging is the fact that Toast is expanding its NRR, implying that each net additional location served is profitable for the company. For this reason, Toast has reported an annual payback period of 15 months per its fourth-quarter 2022 report. Investors should note that Toast has only recently started reporting payback period as part of its investor relations disclosures; however, on the surface a break-even period of slightly more than one year is encouraging to see.
What does Wall Street think?
Investor and Ritholtz Wealth Management CEO, Josh Brown, recently spoke about Toast during a segment on CNBC. Brown used a unique term when speaking about the POS leader by calling it a "horizontally sprawling" business.
Brown's main point is that Toast is growing both in terms of the number of restaurants it serves and the proliferation of its product suite. This places Toast in a unique position in the marketplace, as restaurants can use POS systems for things beyond payments. For example, Toast's platform can be used for gift cards, online ordering, and payroll. In a way, Toast is combining financial technology and human resources with the traditional components of the restaurant business.
As of the time of this article, Toast trades at 3.8 times its trailing-12-month sales. In December 2021, Toast traded at a price-to-sales ratio over 12. While the company's valuation has dropped significantly, it could be argued that the stock is oversold.
Toast's key performance metrics are rocketing higher and higher, and Wall Street is beginning to take note. Now may be an opportune time to initiate a position or lower your cost basis in the stock.
