Is Toast Stock a Buy Now?

Toast (TOST 3.42%) has taken investors on a wild ride since its IPO in Sept. 2021. The provider of cloud-based restaurant management services went public at $40, and its stock eventually hit an all-time high of $65.22 in Nov. 2022.

But today Toast trades at about $15. The bulls lost interest in the company as its growth slowed, it racked up losses, and rising interest rates compressed its valuation. Should investors still buy a few shares of this burnt-out growth stock today?

Image source: Getty Images.

How does Toast make money?

Toast's cloud-based platform for restaurants bundles together guest-facing and kitchen displays, payment processing devices, receipt printers, and add-ons for managing online orders, reservations, loyalty plans, and payroll services.

Toast's platform was installed across about 99,000 locations by the end of the third quarter of 2023, more than double the 48,000 locations it was serving at the time of its IPO. It generates over 80% of its revenue from its financial technology solutions business, which mainly consists of the payment processing fees from its point-of-sale (POS) systems. The rest of its revenue comes from its subscription services, hardware devices, and professional services.

Why did the bulls give up on Toast?

Toast's growth in gross payment volume (GPV) and total revenue decelerated significantly in 2020 as many restaurants shut down throughout the COVID-19 pandemic. That abrupt slowdown forced it to lay off 50% of its workforce. It experienced a brisk recovery in 2021 as market conditions improved, but its growth cooled off again over the past two years as inflation caused restaurants to rein in their spending and customers to dine out less frequently.

Data source: Toast. YOY = Year-over-year.

For the full year, Toast expects its revenue to rise about 40% to $3.85 billion (at the midpoint). During the company's latest conference call, CFO Elena Gomez said that since the "broader macro environment remains mixed," the company expects its "GPV trends to remain at current levels in the near-term."

Toast is still expanding, but it's still deeply unprofitable on a generally accepted accounting principles (GAAP) basis too. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss also widened from $42 million in 2021 to $115 million in 2022. Its heavy dependence on payment processing fees forces it to operate at lower gross margins than other cloud software companies, which makes it difficult to turn a profit because it pays most of its revenue back to card networks and other payment processors. In other words, Toast still hasn't proven its business model is sustainable yet.

CEO Chris Comparato, who led Toast for the past nine years, will also step down at the beginning of 2024 and hand the reins over to the company's co-founder and chief operating officer Aman Narang. That CEO change isn't a surprise because it was already announced in September, but it represents another uncertain variable for Toast's future as its growth slows down.

Could Toast be a good turnaround play?

That decelerating sales growth, red ink, and leadership change drove away a lot of the bulls. However, Toast expects to end 2023 with a positive adjusted EBITDA of $38 million to $48 million as it expands its higher-margin businesses and reins in its spending.

Analysts expect Toast's revenue to rise 41% in 2023 and 26% in 2024. They also expect its adjusted EBITDA to more than triple next year -- profitability may continue to improve as economies of scale kick in.

However, Toast still faces a lot of competition from the fintech services provider Block, which launched its Square for Restaurants platform in 2018, as well as diversified fintech companies like PayPal and Adyen, which both integrate their payment processing services into a restaurant's existing point-of-sale systems.

With an enterprise value of $7.4 billion, Toast might seem cheap at less than two times this year's sales. But Block and Paypal, which are both better diversified than Toast, also trade around the same multiple.

Is it the right time to buy Toast?

Toast has carved out a niche in its market, but I'm reluctant to buy the stock -- even at a 60% discount to its IPO price -- because I'm not confident it can ever turn profitable on a GAAP basis or fend off its bigger competitors in the payment processing market over the long term. It might make a tempting takeover target for a bigger fintech company, but I'd never advise investors to buy a stock simply because it might be acquired in the future.