The past few years have been a non-stop thrill ride for Toast (TOST 3.42%) investors. The stock made its debut to much fanfare in September 2021 and soared 56% on its first day of trading. The celebration was short-lived, however, as the onset of the downturn just weeks later punished the stock, which shed as much as 80% of its value in the months that followed.
Despite the macroeconomic headwinds, Toast has continued to execute on its mandate to transform the restaurant industry with technology. You wouldn't know it by looking at the stock price, but the business has continued to thrive, expanding its customer base, increasing sales, and paring its losses.
A quick look at Toast's unique platform, its large and growing opportunity, and its growth story hint at the company's vast potential. Here are three things about Toast the smartest investors know.
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1. Its operating system focuses on restaurants
Anyone who has ever worked in a restaurant knows the challenges of using a host of disparate software systems that don't communicate with each other, with each one serving only a single purpose. Toast has set about to change that by developing a cloud-based software-as-a-service (SaaS) platform built specifically for the unique needs of the restaurant industry.
The platform offers a host of modules that can be tailored to the individual needs of the business and can handle such diverse areas as inventory, staff management, marketing and loyalty programs, digital ordering and delivery, and payment processing, among others -- all from a single, easy-to-use interface. Toast says its platform serves as a "restaurant operating system."
By alleviating the pain points common to restaurants of all sizes and types and providing services to help expand into new opportunities, Toast has carved out a potentially lucrative niche for itself in an industry that's sorely in need of an upgrade.
2. It's chasing a large and growing market
While there's no lack of competition for digitizing the restaurant industry, it's arguable that no rival offers a more complete solution, which could make a big difference in attracting future users.
According to Toast, the restaurant industry is one of the largest in the U.S. and worldwide, with 860,000 locations nationwide and 22 million globally. This represents a significant and largely untapped market for Toast's end-to-end restaurant operating system.
The company reported $1.2 billion in annual recurring revenue (ARR) in the third quarter, which pales in comparison to Toast's massive opportunity. Management estimates the company's total addressable market at $55 billion in the U.S. and $110 billion worldwide. While many investors take those numbers with a grain of salt, it helps to illustrate the enormity of the opportunity ahead.
3. Growth is (understandably) slowing
Looking at the declining stock price over the past couple of years, you'd be forgiven for assuming that Toast's growth had fallen off a cliff -- but that simply isn't the case. Growth has certainly slowed, but that needs to be put into context.
For example, despite the worst economic downturn in over a decade, Toast grew revenue by 60% in 2022, though that was down from triple-digit growth the year before. Growth has slowed even further, as the company generated revenue growth of 44% year over year during the first nine months of 2023. The slowdown was even more noticeable in the third quarter, as revenue grew 37%.
That said, given the macroeconomic backdrop, it isn't surprising that Toast's growth has slowed. What is surprising is that the company bucked those headwinds for as long as it did. It's also worth noting that the third quarter has historically been the company's weakest, so investors should look to see if Toast produces higher growth in Q4, which would confirm the seasonality of its recent weakness.
For most companies, 37% revenue growth would be enviable, so this isn't a sign investors should throw in the towel just yet, though the trend bears watching.
Why Toast is a buy now
Investors initially avoided Toast due to its frothy valuation. However, as a result of the stock price declines over the past few months, the stock is selling for a song. Toast currently trades for less than 2 times forward sales, down from more than 25 times forward sales just a few months ago.
To be clear, it's still early in Toast's growth story, and plenty will have to go right for the company to succeed. However, its solid growth, large opportunity, and bargain-basement price suggest Toast is a buy at current prices.
