Etsy (ETSY 0.34%) is a business that most investors are probably familiar with these days. Chances are that you've shopped on the platform in the past, maybe for face masks during the pandemic or for a gift for a loved one more recently.
However, a company like Toast (TOST 3.42%), which isn't a consumer-facing enterprise, could be off your radar. Its focus on restaurant owners likely means that average investors might not know much about it.
These businesses have their own positive traits. But with both stocks well off their all-time highs, which one makes for the better investment today? Let's take a closer look at each to come to a conclusion.
The asset-light online marketplace
Etsy is the leading online marketplace for specialized and handcrafted goods. The company connects 97.3 million buyers with 8.8 million sellers across the globe, collecting fees in the process. What makes this business unique is the sheer differentiation of the platform. An eye-opening 87% of buyers say that Etsy has items they can't find anywhere else. This protects Etsy against the threat of a juggernaut like Amazon.
As consumers were stuck at home during the worst days of the pandemic, Etsy saw its revenue and gross merchandise sales (GMS) soar. However, macroeconomic headwinds have pressured consumer discretionary spending, leading to much slower growth for the business. In the most recent quarter, revenue was up by 7%, with GMS rising by only 1.2%. This helps explain why shares have gotten crushed in the past couple of years.
But management is optimistic about the long term. It believes Etsy's total addressable market is $466 billion in just its seven core geographies. And in the near term, should the Federal Reserve and other central banks lower interest rates, it could lead to much stronger consumer spending, which could benefit this business.
The restaurant operating system
Toast provides various hardware, software, and financial services solutions that help restaurant owners better operate their businesses. Offerings include point-of-sale devices, payment and payroll processing, online ordering and delivery capabilities, and inventory management. As of Sept. 30, Toast served 99,000 of 860,000 restaurant locations in the United States, giving it meaningful market share.
As an earlier-stage company, Toast is still registering huge growth. In the latest quarter, revenue jumped 37% year over year. And while the business has yet to generate profits, investors have reason to be optimistic. Toast's net loss of $31 million in the third quarter of 2023 was less than one-third the $98 million loss in the prior-year period. As Toast is a cloud-based software-as-a-service enterprise, the hope is that as the business scales up, the bottom line should start trending in the right direction.
Maybe the most attractive trait is that Toast already appears to have an economic moat in the form of switching costs. As restaurants install and get familiar with the company's offerings, they are unlikely to change to competing providers, even if the cost savings are sizable. That's because this could cause operational disruptions that are best avoided by staying with Toast.
A difficult decision
There is clearly a strong argument to be made for investing in each of these companies. Making the decision even more difficult is the fact that both stocks trade at compelling valuations.
Down 76% from its peak, Etsy shares sell for a forward price-to-earnings ratio of 14.5, close to the lowest it's been in the last three years. Because Toast is earlier in its lifecycle, it's better to value it based on revenue. The stock trades at a price-to-sales multiple of 2.6, which is well below its historical average.
On one hand, Etsy already operates a proven business model that generates lots of free cash flow. And Toast is cementing itself as the mission-critical software provider to the restaurant sector. I don't see any reason why investors can't add both stocks to their long-term focused portfolios.
