Toast (TOST 3.42%) and Amazon (AMZN 3.43%) changed how restaurants and merchants, respectively, operate their businesses. Toast's cloud-based platform for restaurants bundled together guest and kitchen displays, payment processing devices, and tools for online orders, reservations, loyalty plans, and payroll management.
Amazon, the largest e-commerce company in the world by annual revenue, became synonymous with online sales across most of its markets. It sells products through its first-party and third-party online marketplaces, and it operates brick-and-mortar stores through its own Amazon Go and Fresh banners and its Whole Foods Market subsidiary.
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Toast went public on Sept. 22, 2021, but its stock now trades more than 50% below its IPO price. Amazon's stock slipped about 10% during the same period. Let's see why Amazon stayed ahead of Toast -- and if that trend will continue in 2024.
Toast faces near-term challenges
Toast's total number of installed locations more than doubled from 48,000 at the time of its IPO to about 99,000 locations by the end of the third quarter of 2023. It suffered a slowdown throughout 2020 as restaurants closed down during the pandemic, but it experienced a brisk recovery in 2021 and 2022 as the pandemic passed.
Toast's gross payment volume (GPV) and revenue more than doubled in 2021, then grew another 61% and 60%, respectively, in 2022. But in the first nine months of 2023, its GPV rose only 40% year over year while its total revenue increased 44%. For the full year, it expects its total revenue to rise about 40% to 41% to a range of $3.83 billion to $3.86 billion.
Toast is still growing rapidly, but inflation is driving many restaurants to rein in their spending. It also remains unprofitable on the basis of generally accepted accounting principles (GAAP) because it generates most of its revenue from payment processing fees, which are mostly paid back to card networks and payment processors instead of being accretive to its own earnings. Intense competition from similar platforms, such as Block's Square for Restaurants, is exacerbating that pressure.
Toast already laid off half of its workforce during the pandemic to streamline its business, but it might need to make deeper cuts to achieve its goal of achieving positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2023. Analysts expect it to squeeze out an adjusted EBITDA profit of $46 million for the full year.
In 2024, analysts expect its revenue to rise 26% to $4.84 billion as its adjusted EBITDA surges 230% to $152 million. Based on those estimates, Toast's stock might look reasonably valued at 58 times next year's adjusted EBITDA -- but its cooling sales growth, competitive headwinds, and persistent GAAP losses could limit its gains.
Amazon's growth is finally stabilizing
Amazon generates most of its revenue from its e-commerce marketplaces, but most of its profits actually come from Amazon Web Services (AWS), the world's largest cloud infrastructure platform. Therefore, Amazon usually subsidizes the expansion of its lower-margin marketplaces with its higher-margin cloud revenue.
Both of Amazon's core businesses grew throughout the pandemic as more consumers shopped online and more companies upgraded their cloud services. Its growth continued in 2021 as its revenue and earnings rose 22% and 55%, respectively.
But in 2022, inflation throttled Amazon's online sales, and the macro headwinds drove companies to rein in their cloud spending. To make matters worse, its massive investment in the struggling electric-vehicle maker Rivian (RIVN 6.10%) backfired and wiped out its net profit. As a result, its revenue rose only 9% as it posted a full-year net loss.
However, Amazon's revenue growth accelerated throughout 2023 as its retail and cloud businesses stabilized. The expansion of its advertising business -- which sells ads across its marketplace, websites, and streaming platforms -- further boosted its margins. Rivian's stock also gradually recovered over the past year as its production rates stabilized. That's why analysts expect Amazon's revenue to rise 11% for the full year as it turns profitable again.
For 2024, they expect Amazon's revenue and earnings to grow 11% and 34%, respectively, as the macro environment improves. However, it still faces stiff competition it faces from PDD's Temu and Shein in the e-commerce market as well as Microsoft's faster growth in the cloud market. Its stock also isn't a screaming bargain yet, at 40 times forward earnings.
The better buy: Amazon
Toast still has plenty of room to grow, but it probably rally back to its IPO price until it proves its business model is sustainable. Meanwhile, Amazon has a long track record of recovering from cyclical downturns -- and it should recover throughout 2024 as its retail and cloud businesses recover. So for now, I believe Amazon remains a better buy than Toast.
