From their late-2021 pinnacle to the current trough, Toast (TOST 3.42%) shares have taken a dizzying 74% price plunge. But this doesn't look like a downward spiral to me. Rather, I'd call it a runway for savvy investors. Let's see how the restaurant management software expert's steep drop appears to be a wide-open buying window.
What does Toast do?
Think of Toast as the Swiss Army knife for restaurateurs: From taking orders to crunching numbers, it's got nearly everything covered. Its cloud-based software covers everything you need to run a restaurant -- or a drive-thru taco joint, or a hole-in-the-wall café, a local chain of bars, or whatever.
The platform serves as a single integrated tool handling many different functions, typically done by a variety of software tools, spreadsheets, or even handwritten notes. Every part of Toast's system is connected to everything else, feeding sales details into marketing campaigns and making inventory counts easily available to cooks and servers. Running low on salmon but overstocked on Alfredo sauce? Every server should recommend the pasta special today! Toast doesn't just track all this information, but makes it easy to use for every section of the restaurant.
Why is the bottom line printed in red ink?
Some investors shy away from Toast due to its deeply negative earnings and minimal cash flows. That's why the stock is down more than 70% from its all-time highs, including a 25% drop in the last six months.
However, this is classic growth-stock material. Toast isn't pocketing profits quite yet. Instead, the company is expanding its business as rapidly as it dares, with a few unusual marketing tricks up its sleeve. The goal is to quickly build a massive user base, shifting over to focus on profits in a few years. This is a common management style in the tech sector and often seen in consumer-goods industries such as restaurant chains and media services, too.
So the bottom line is printed in red -- by choice. These early losses are part of a long-term plan to maximize profits many years down the road.
A costly but effective marketing approach
The company sells hardware at a loss, essentially using those point-of-sale systems and order-taking tablets to draw in cost-sensitive restaurants. This tactic goes a long way toward explaining Toast's negative profits. It also helps the company put its tools in front of many new customers, with the idea that experiencing this handy-dandy system will make them loyal and sticky clients for the long term.
Toast's software really does strike a chord with people who try it. The loss-leader strategy generates plenty of buzz and positive word-of-mouth referrals. The company amplifies this effect by focusing its expansion efforts in small geographical areas. When people from a few different food spots meet up after work and the chat turns to this cool new service management system, Toast should expect a bunch of new trial orders. Lather, rinse, and repeat a few miles down the road. It's a clever recipe for low-cost marketing success.
And it's working like a charm. The company serves roughly 100,000 locations nowadays, up from 74,000 restaurants one year earlier. That's a 34% jump. Revenue rose 37% in the same span and gross payment volumes in Toast's payment-processing system gained 34% to $33.7 billion. Yes, that's billions and not millions -- Toast's market reach is already quite impressive.
I'm engrossed in Toast, growing from coast to coast
In summary, while Toast's 74% drop from its IPO highs may deter some, it presents a ripe opportunity for forward-thinking investors. This decline reflects a strategic choice to prioritize expansive growth over immediate profits, a playbook successful in tech and consumer sectors alike. The growth story continues under that dark market cloud, probably to be followed by international expansion later on. So far, Toast's business is so all-American that the company doesn't even report international sales.
At the same time, the stock is priced for absolute disaster, as if the business were headed off the rails instead of running a controlled growth strategy.
There are potential obstacles in the road ahead, of course. Toast is adapting its proven solutions for small-scale operations into an enterprise-class platform -- not necessarily an easy process. Managing public perception is another challenge, as shown in last fall's customer uproar about a new $0.99 fee for online orders. The company's growth depends on a positive market reputation, so Toast's management can't afford too many of these gaffes.
Still, Toast's impressive growth in locations and revenue, coupled with its innovative approach, hints at a promising future. It's a compelling pick for investors who see beyond the short-term fluctuations and can focus on Toast's future possibilities.
