What happened
Shares of restaurant-technology company Toast (TOST -0.52%) dropped 15.2% in February, according to data provided by S&P Global Market Intelligence. The stock was actually up 16% early in the month before reporting disappointing financial results midmonth that sent the stock into a free-fall.
So what
On Feb. 16, Toast reported full-year financial results for 2022. Many of its metrics were better than analyst expectations, but investors seemed concerned about the company's bottom line. Consider that full-year revenue increased a whopping 60% year over year to $2.7 billion. But its loss from operations got worse, going from an operating loss of $228 million in 2021 to an operating loss of $384 million in 2022.
Looking at adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) -- a much easier profitability hurdle to jump over -- Toast still had a loss of $115 million in 2022. And while management expects this to improve in 2023 to an adjusted EBITDA loss between $10 million and $30 million, that's still a loss. Moreover, profitability metrics that aren't adjusted will likely look far worse.
Investors' appetite for cash-burning tech stocks is almost non-existent right now and that explains a lot of the drop for Toast stock in February.
Now what
I can appreciate the market's increasing desire for profits. However, investors who pick stocks are tasked with the challenging assignment of trying to figure out what a company's profitability will be in the future, not what profitability looks like right now. And I believe there's good reason for optimism for Toast stock.
In 2022, 83% of Toast's revenue came from its financial technology solutions segment, which has a low gross-profit margin of 21%. This revenue is transaction-based and not where the real opportunity lies for the company. These services should be considered more entry-level.
The real opportunity for Toast seems to be in subscription services. With a gross margin of 65%, it certainly could be more lucrative. And this is the part of the business that's growing the fastest. Revenue for the subscription services business segment jumped 92% year over year in 2022.
Toast has many subscription software modules that its restaurant customers can activate to address different needs. At the end of 2022, 65% of the company's customers were using at least four modules, up from just 49% two years ago.
Toast's customers are adopting its high-margin software solutions at a rapid pace. Therefore, while its bottom line is challenged at the moment, this opens up the possibility that Toast's bottom line could look far different in three to five years, which is why I believe this is an unprofitable growth stock that could be worth buying today.
