Shares of restaurant technology company Toast (TOST 3.42%) went up 22.8% in December, according to data provided by S&P Global Market Intelligence. Many of Toast's peers also went up by a similar amount during December, showing that the market was smiling upon almost all these businesses and not just Toast.
The performance of Toast stock can be compared to that of a financial technology (fintech) exchange traded fund (ETF) such as the Global X FinTech ETF. It can also be compared to that of similar companies such as Shift4 Payments and Block, the latter of which Toast considers its top competitor.
As the chart below shows, Toast's performance largely mirrors that of the others.
TOST Total Return Level data by YCharts
That said, the chart does also show that Toast got a little extra boost midway through December, and that might have something to do with a monthly report from the Census Bureau. On Dec. 14, this report showed that sales for food services and drinking places were up more than 11% in November compared with the same month of 2022.
That's a strong year-over-year gain for the restaurant industry. And since restaurants are Toast's target customers, this bodes well for Toast, too, although there's a caveat.
Why is the market excited about Toast?
Investors should understand that in November, Toast hit its lowest valuation ever from a price-to-sales (P/S) perspective. And going into December, it traded at a P/S of 2.2, which was still pretty close to its lowest. In short, expectations were low, but the market rally in December allowed for a nice rebound with Toast stock.
The retail report in December also helped. At the end of the third quarter of 2023, Toast was in 99,000 restaurants. Therefore, since the retail report showed booming restaurant sales, this is seen as good for Toast's business as well.
Toast's hardware devices allows restaurants to process transactions. So an increase in sales will allow the company to make more money here. That said, investors need to remember that processing transactions is a low-margin activity for Toast. Therefore, while higher restaurant sales are good, it's not the most meaningful thing to watch.
Here's what Toast investors should watch
Toast investors should be watching for new customers and for an increase in subscription products per customer. Investors can't really monitor these things in real time but rather must wait for quarterly financial reports.
In the most recent quarterly report, things looked promising for Toast. The company added roughly 6,000 new customers in Q3, and its subscription-services revenue was up a whopping 46% year over year.
Toast has plenty of room to add new customers, both domestically and internationally. And the majority of its customers only use a fraction of its available subscription modules. Therefore, this does seem to be a company with plenty of upside, which could make it a stock to buy.
