Why Toast Matters (the Company, Not the Food)

In this podcast, Motley Fool host Ricky Mulvey and analyst Jason Moser discuss:

• Alex Chriss' first earnings call as CEO of PayPal.
• Renewed focus for the payments company.
• Airbnb's quarter and questions for its international growth.
• Investors going through an "airline stocks phase."

Motley Fool host Mary Long and analyst Tim Beyers take a look at restaurant tech company Toast.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Nov. 2, 2023.

Ricky Mulvey: PayPal has a new dad and his name is Alex. You're listening to Motley Fool Money. I'm Ricky Mulvey joined today by Jason Moser. Jason, good to see you.

Jason Moser: Hey Ricky, good to see you. How's everything?

Ricky Mulvey: That's going pretty well, how about for yourself?

Jason Moser: You know, I could complain but nobody ever wants to hear it anyway. [laughs].

Ricky Mulvey: I want you to complain. Five minutes of JMo complaints.

Jason Moser: All as well in the neighborhood. We had a successful Halloween and, now we're kicking off Thanksgiving month, and so I'm excited to get that bird on the trigger this year.

Ricky Mulvey: Well, speaking of kicking things off, Paypal has a new CEO, Alex Chriss, thirty days on the job. I'm not going to ask you to judge his performance. He can't really do anything in thirty days. But yesterday was his first earnings call, gave investors a first impression. What was your take on Alex's first impression to the Paypal shareholders?

Jason Moser: I'm optimistic. I mean, I really feel we've got someone in the CEO office there that is aware of the potential that this business has but also is aware of some the unforced errors that they've committed along the way. That have the market really looking at this thing, more glass half empty, right now. His feelings regarding the business, and it seems, we talked about this in production. The word focus was used a lot. I think we could argue that the company has probably lacked focus here over the last several years as it's tried to, you reinvent itself and become that super at that we heard Shelman always talking about really, at the end of the day that didn't seem like it was the wisest move. They're whittling down the cost structure, focusing more on what they do well, which is payments. I think that his awareness of some of the concerns in the investing community is encouraging. I mean, I think, one of the things we got on that call yesterday was a clear admission that they're not giving us the key performance indicators that tell us how this business is doing. It's been difficult to judge this business because, the information is just not so granular. We didn't get that level of granularity that I think a lot of us are looking for. It sounds like that's getting ready to change, which is a good thing.

Ricky Mulvey: Yeah, I will note that Shelman was thanks "for his diligence in professionalism on handing the reigns over absolutely nothing on the past leadership from the new CEO, Alex Chris, and he did talk about the key performance indicators. You tell me how big of a problem was this for Paypal? This is the quote." I believe in the last several years it has been difficult to model our company consistently because the company itself hasn't provided consistent metrics to allow you to do so. That is going to change." You're an analyst, you follow Paypal. What are the metrics you need to see out of the new form of the leadership?

Jason Moser: Well, I think ultimately, Paypal today is much different than it was, years ago. I mean, this isn't just some app where you just, send money to your friends. I mean, it's a big and somewhat complicated business. I mean, you get Paypal and Venmo and Braintree. There's branded, there's unbranded. This growing focus obviously on small and medium sized businesses or SMB's you hear them talk about. I think, it's been a problem for a while be it the lack of these key performance indicators really giving us, a way to judge their success and their progress. This isn't just, we're looking at gross dollar volume being pushed through the network anymore. I mean, each facet of the business, plays its own role, and so I think getting those KPI's getting those metrics where we can gauge the success of each part of this business is going to be extremely helpful. I mean, I know I'm not the only one. I think it's been a very common complaint in the investing community is just not being able to really judge their progress or lack of and now, I mean, it feels like we're going to be able to look under the hood at each of these drivers of this business and understand more the levers that they can pull with Paypal or with Ven Moor. What is happening with Braintree and branded versus unbranded. We're going to see, a big focus on this Paypal, complete payment solution. That was a big theme of the call as well. So I think that, next quarter is going to be very enlightening from that perspective and I'm looking forward to it.

Ricky Mulvey: Yeah, we got eighteen mentions of the word focus and that was just in the opening remarks for Alex Chris, [laughs] he is going to repeat that into your skull. He also had a couple of innovations that he wanted to highlight. I'm going to give you the menu and then you tell me if any of these are really worth investor's attention. Number 1, we got a cashback credit card. Number 2, a unified Paypal rewards program. Twenty five million users in the past twelve months. They've also highlighted easier sign in experiences, reduced friction and then number four, JMo, the first regulated stable coin by a global payments company [laughs] which connects Paypal and Venmo accounts. Let's go crypto's back.

Jason Moser: Yeah. Well, you know, I'm not the biggest crypto guy, so I'll just [laughs] decline to really comment much on that. To me, it seems like they're taking just a measured approach in whatever crypto aspirations they have. That's a good thing I think. Not going all in. I think with Paypal, reducing friction is always key. It's frustrating if you are going through a check out, for example and then you get to that last step and how you want to pay isn't necessarily supported. I think reducing friction, they've opened up now to where they are part of the Apple wallets and Google wallets. Again, that Paypal Complete Payment solution I think is going to be something that really ultimately reducing friction that creates longer stickier relationships with consumers. Listen, everybody loves rewards. I think a unified Paypal rewards program that makes a lot of sense too you. For heavy users of the service, I mean, that's something that keeps you coming back for more.

Ricky Mulvey: All right. We also got Airbnb earnings but anything else you want to hit from Paypal before we move on?

Jason Moser: No. I think this was a great introductory quarter I think for new leadership, and I think next quarter is really what we're looking forward to because we're going to get a better idea of exactly how they're going to take this business forward. I think, it's worth noting too, the sale of that happy returns business to UPS. That I think is a good example of focus. Get rid of these things that just don't have much to do with your core business. And thankfully, they sold that to UPS and they, they actually made a little money on that deal. So, good outcome there.

Ricky Mulvey: All right. Investors, they're a little tepid about Airbnb's latest quarter. It's got revenue for $3.4 Billion. That is up 18% year over year adjusted net income for 1.6 billion. That is the highest ever, it's active listing supply, the number of houses, condos, rooms, grew at about a 20% clip. That's an extra million places to stay, and then they also announced $500 million in stock repurchases over the quarter. What do you think is worth highlighting?

Jason Moser: Well, I understand it's a lot of uncertainty in the world right now. This is truly a global business. I think when you look at the cross border, for example the so cross border nights booked increased 17% in the quarter, they actually call that Asia Pacific having fully recovered to pre-pandemic levels. I think from a global perspective, you look at the opportunity that they're pursuing in travel. The tourism industry is greater than two trillion dollar opportunity. Now obviously that's not Airbnb's total market opportunity. But it just goes to speak to how large of an opportunity this is. I think you see this business ebb and flow a little bit as it's figuring out its place in the world. We've talked a lot about the headline risk with New York City and what was it? The local law that they passed through essentially banning short term rentals. It was a headline, but it wasn't terribly fundamental to their business. I think they said it represented maybe one percent of overall revenue.

It does feel like they're finding their way in this world like we saw with Uber back in the day when it was really getting established. I think for me looking at this from the global perspective, I understand the concerns, at least in regard to the forward-looking guidance there. Because international travel right now is a little bit of a riskier proposition than it has been in the past. But all things considered, it's a very important business, I do believe. If they shut their doors tomorrow the world would feel it. To me, nothing really to point out than maybe getting a little bit more insight into what they want to do with their experiences next week. I think they have their big winter release and so we'll get some more information there as to updates they've made and the strategy that they're taking with that experiences out of the business because that can be a very complimentary one.

Ricky Mulvey: Yeah. Chesky talking about cities opening the doors to Airbnb a little bit more. I think San Diego was one of them. Of course, that's not going to grab the headlines quite like one shutting off Airbnb. But yeah, the experiences thing is a little bit of a concern, Jason. That's the plan for New York City and before the show, we're doing research and there are experiences in New York City that look lovely. You can have a tour. They have comedy shows. There's someone that'll yell at you while you walk across the Brooklyn Bridge with them. But a lot of the business inexperiences or a good chunk of it does seem to be people taking photos of you in front of oncoming traffic. I guess, what is your message to those experienced buyers that would like those photo shoots in Times Square in front of oncoming traffic?

Jason Moser: I just make sure your insurance policies are up to date and take out a little bit more if you need it because that sounds like an accident waiting to happen. [laughs]

Ricky Mulvey: Last thing I think that Airbnb hasn't really approached yet, but makes a lot of sense for the business is a loyalty program.

Jason Moser: Yeah.

Ricky Mulvey: Chesky told Bloomberg that they're thinking about it, but it really wouldn't have anything to do with points or free stays saying, "It would probably be more novel than a standard points program, not like a subsidy program which is what most programs are but something where when you use it, the service actually gets better." I don't know what that means.

Jason Moser: Yeah. It's difficult to say. You're getting rewards by virtue of the card that you're using to pay for your Airbnb stays. Maybe there's the Airbnb power users. Maybe this gives you free upgrades or maybe you get to waive the cleaning fee or something. I don't know. It sounds like they have to give that one a little bit more thought. But loyalty programs, they pay off. You're giving people a reason to keep using and to keep coming back. As long as they execute it thoughtfully, it seems like it has some potential.

Ricky Mulvey: Let's finish off with a little bit of mailbag. We got an X or a post or a Tweet or a message on the platform, formerly known as Twitter, from @taylor_franklin. I'll ask you this, Jason. Does every lifelong investor regrettably go through a "I should buy an airline stocks phase?"

Jason Moser: [laughs] Yeah, I think so. I think the longer that you invest, the more success you witness but the more mistakes you make. It's a never ending learning experience. Yeah, airline stocks are funny. I'm assuming this is not just focused on airline stocks, but that's probably an easy one because I think historically that's been a pretty tough investment. I think Warren Buffet's got some pretty good quotes out there on investing in airlines. Even he flip flopped and decided he needed to get into airline stocks at some point. But yeah, I think we all go through that and the key is to just make sure that you're aware of it and that you learn from it. Ricky, we just got through with this big spac phase. We all probably suffered a little bit from that spac phase. I know I did a harvest. Where are you now? That was a dumb investment on my part. But hey, listen, I learned from it and so, yeah, I think the key is embracing the fact that you're going to go through those phases and learning from them and being able to identify that and saying, well it feels like I'm in this phase. The last time I went through a phase, what did I learn? Should I just avoid going through this phase? Is it just a phase? [MUSIC] I think that's really the key is just always keep an open mind as an investor and just embrace the learning opportunities because that's what they are.

Ricky Mulvey: Jason Moser, thank you for your time and your insight.

Jason Moser: You got to thank you.

Ricky Mulvey: The analysts you here on the show, well, they have a whole other day job providing premium coverage and recommendations for the Motley Fools suite of stock investing services. We're giving our listeners a discount on Motley Fools flagship service. It's called Stock Advisor. If you're interested in more analysis from our team, two stock recommendations per month and access to stock advisors, full scorecard of companies, visit fool.com/MFMdiscount. I will also include a link in the show notes. When a stock drop 75% is it time to order up or are things toast to? Up next, Mary Long talks with Tim Beyers about a beaten up restaurant, textile.

Mary Long: To kick us off, I think I should admit my biases upfront because when I go to sit down at a restaurant, I have a nice meal and then at the end, the check arrives in the form of a little white box that I'm supposed to tap my credit card onto. I turn into a carmugeny luddite like version of myself. The point is, I don't want to like Toast. What am I missing? Is Toast anything besides a point of sale system?

Tim Beyers: It is. It solves what I often call a migraine level problem. What I mean by a migraine level problem is if you have a headache, aspirin is nice but sometimes you can go to sleep and ride it out. But if you have a migraine, you will pay whatever is required in order to get relief for that migraine. I like to be investing in companies that solve migraine level problems because they tend to have things like pricing power, they tend to have a little bit of a competitive advantage. In the case of Toast, the migraine level problem here is that if you're a restaurant operator, you do need to be investing in everything from the point of sale system, to managing ordering reservations, integrating with delivery systems, managing your payroll, managing just a bazillion things. There's a lot of digital systems that you need to be invested in and which need to be integrated.

You can do really one of two things. You can hire somebody who will get the tech for you and then integrate it all for you or you can go with Toast, which has what I would call a full scale restaurant operating environment. They give you all of the things that you need for the tech infrastructure for a restaurant which is very attractive if you're a restaurant operator, particularly if you're a restaurant group that has say like five to up to 20 locations, you get all the point of sale, you get all the hardware, then you get all the software, you get all of the integrations. The way Toast charges is they will charge you something for that hardware and they do charge a subscription fee, but the key feature here that is a win-win for the restaurant, really a win-win win for the restaurant. The weight staff and Toast itself is what's called the Fintech side of the business, where they are taking a small slice, about 50 to 55 basis points off of the fees that are generated through just the business that runs through the restaurant. As the restaurant does more business, Toast makes more money. As the restaurant makes more money, Toast makes more money. As the restaurant makes more money and turns tables faster, those wait staff are happier too, because they're getting more tips. They might be getting bigger tips. A lot of people win by putting toast in place and that's something I very much like about this business.

Mary Long: I think the massiveness of that migraine is reflected in the fact that the restaurant business is pretty notoriously tough. The National Restaurant Association reports that just 20% of restaurants actually make it past the five year mark. Then for those that do succeed, margins are famously slim. Do you think that that high failure, low margin combo, does that affect Toast prospects at all?

Tim Beyers: It does, but it also provides an ever refreshing pool. This is something that is true about every company, and you know the names because they're Motley Fool picks, that deals with small businesses of any sort. Let's talk about HubSpot, let's talk about Shopify. These are businesses that cater to a sector of industry, where the churn rate is high because the failure rate among small businesses is high, and that would be a really big problem if there weren't always new concepts, new small businesses being created. In the case of the restaurant business, there's always a new restaurant concept, Mary. I mean, there have been so many of these and that will always be true. We will always find ways to go out and have a good dining experience. Whether we're talking about quick serve or in the case of really the core of toast customers, is a sit down experience. Maybe have a bottle of wine, a good meal.

We're talking primarily about that type of restaurant and restaurant group where it's an owner that is not a massive chain. There are maybe two or three different proprietors who came together, had a concept, and wanted to build something, and they've gotten to ten locations. Those are the people who have really no interest in the entrenched player here, which is Micros, which was acquired by Oracle, been around for years. They have not been all that modern and they've been much more of a point solution, and so Toast has been taking share from them. For those that have been around for a while, Micros has been a big target and Toast has been getting a lot of business replacing those Micro's point of sales systems. I think that's probably going to continue.

Mary Long: This is still an early stage company. Revenue has been growing at a good clip, but Toast has yet to turn any net income. Third quarter earnings for the year come out next week. But long term, what kind of returns do you expect to see from toast in the next 5, 10 years, and what do you think it needs to do to actually get there?

Tim Beyers: Well, there's a number of things that it needs to do to get there. There's a couple of main drivers for Toast. The first is number of locations, and in the latest quarter, I'm just checking my numbers here. If I look at it, in the last quarter that ended June 30, they were up to 93,000 locations. Now, Toast has said that their addressable market in the US is a bit over 800,000 US restaurant locations. Across the world, they think that addressable market and they are going international, that can be over 20 million. Locations are a big part of this. They want to multiply the number of locations they can get into. They're doing a very good job of doing that. Just for comparison's sake here, Mary, from June 30th, 2023 to June 30th, 2022, that's from 68,000 in the year prior quarter up to 93,000. So adding 25,000 locations in a year. That is an impressive number. What we're hoping when we see in the current quarter is more growth in locations.

But really what we want to see in addition to that is steady growth upwards in terms of revenue per location, profit per location, and total business that these restaurants are doing. I think if they continue on this trajectory they're continuing on, Mary, they can get to a place where they're generating about a 15-16% free cash flow margin. Get to about 250-300,000 locations. If they get there at the rate they're growing the revenue, their earn per location, this is a company that can generate 20% plus average annual returns over several years, maybe even up to a decade. That's a lot. A lot of things need to go right. They're going to be subject to things like macroeconomic conditions, consumer spending. This will not be linear, but the seeds are there for this to be a very successful growth company over the next several years.

Mary Long: In spite of that growth in number of locations that you mentioned, the stock is down nearly 75% from the high that it hit at $65 per share, which happened right after its IPO. Do you see that as a product of these macro level conditions and things that you just mentioned or is there another reason why the market is valuing this company so differently?

Tim Beyers: The valuation needed to reset. I mean, let's just be honest. They came out the gate in their IPO and they were valued way too richly, way too early, and the valuation had to come back to normal. Now, it has come back down to a much more rational level. I would call this stock pretty fairly priced and potentially cheaply priced if the growth holds up. But I wouldn't call it cheap on a pure basis because it's not yet profitable. But I think it is priced for very good growth over the long term, but initially, Mary, it was vastly overvalued coming out the gate. The market has reset the pricing here. Now, more recently, what's driven down the price are a couple of things. First, the flub with putting on digital orders, they decided to try to put on a 99 cent digital ordering fee onto every toast order that was a digital order, and that went over like a lead balloon. That did not work well, and they had to admit the error and backtrack from that, which I think was the right thing to do.

Then the other, I think is a pretty big misunderstanding about a CEO transition. Chris Comparato, who had been the CEO and had worked with the founding team for a really long period of time, including at their prior company, it was time for him to move on to become Executive Chairman. Then CEO is not somebody who's coming in from the outside. This is a founder, this is Aman Narang who has served in a number of different operational roles for Toast. He helped lead sales early on in the company's life. This is somebody who's been training for a step up to the CEO role almost since day one. He still owns a fair amount of stock in the company. I think this is probably the least controversial, most interesting, and most useful CEO transition I've seen in a while. The fact that the stock is getting whacked on that, only makes me more interested in buying more.

Ricky Mulvey: As always, people on the program may own stocks mentioned. The Motley Fool may have formal recommendations for or against. So don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.