It hasn't been easy at all to be a Toast (TOST +1.21%) shareholder. Since going public during a market boom in the fall of 2021, the stock has cratered. As of Dec. 15, it's 74% below its peak price. But that doesn't mean investors should completely avoid this restaurant-focused software and service business.
There are some favorable attributes that can't be ignored. Toast might've been a poor investment in the past, but over the next three years, it could be a winner. Here's why.
Growth is key to the story
Toast's revenue went from $665 million in 2019 to $3.6 billion in the trailing 12 months. Clearly, rapidly rising sales are the most important aspect of this company's story right now. And it makes sense why.
It all starts with Toast's customer value proposition. The business provides various mission-critical services for roughly 100,000 restaurant locations in the U.S., like payment processing, online ordering, delivery and takeout, inventory tracking, and staff management.
Toast offers an end-to-end solution that focuses intensely on the user experience and makes life easier for restaurant owners and operators. The fact that Toast is growing so much is proof that it's catering to a need in the industry.
There's no doubt that over the next three years, this company is poised to be much larger than it is today. This means a bigger customer base and greater revenue.
In the third quarter, Toast generated $1.2 billion of annual recurring run rate (ARR) revenue. This is a critical metric that management follows as it showcases the stickiness of customer relationships via subscriptions. The leadership team believes the ARR total addressable market, just in the U.S., is estimated to be $55 billion. So, there is obviously a massive runway to capture in the years ahead.
Toast can also become more successful by keeping its attention on innovation. Introducing new product and service features will not only satisfy existing restaurant clients, but this strategy can also make it easier to bring on new ones.
NYSE: TOST
Key Data Points
Show me the profits
For a company that is focused on growth above all else, it shouldn't be surprising that profitability has been elusive. In 2022, the business posted a net loss of $275 million. And through the first nine months of 2023, this figure totaled $210 million.
You would assume that investors would let this unfavorable situation slide in favor of market share gains. This was certainly the case in a lower interest rate environment.
But we are in different economic times right now. Investors might seem to care more about positive profits when the state of the economy is uncertain. And if this is the case in the next few years, Toast's income statement better get in the black sooner rather than later.
To its credit, Toast's Q3 net loss of $31 million was much lower compared to the year-ago period. You should hope that management isn't sacrificing its growth opportunities by trying to be too efficient.
Perhaps as the business continues to scale up, it can show signs of operating leverage and an improving bottom line. I think this could work wonders for the stock price.
Add in a valuation tailwind
There's another factor that could prove to be a nice tailwind for investors over the next three years: the valuation. All else equal, it's always better to pay less for a company, as it creates the potential for higher returns.
Since the stock has gotten so crushed, it's not expensive right now. Shares trade at a price-to-sales (P/S) ratio of 2.5, which is about half the historical average valuation.
Should Toast continue on its path of growth, while at the same time inching closer to consistent net income, the P/S multiple should get a boost. And shareholders, no doubt, will be very happy.
