Restaurant-technology company Toast (TOST 1.75%) is unprofitable, and it's not even close to breaking even. Through the first three quarters of 2023, the company reported a net loss of $210 million on $2.8 billion in revenue.
On top of this, Toast lost $762 million in 2021 and 2022 combined. In short, the business has lost roughly $1 billion in less than three years.
NYSE: TOST
Key Data Points
In isolation, Toast's net losses make it look like a bad investment idea. But investing isn't about what's already happened; it's about what happens next. Looking ahead, Toast does have three tangible ways to improve its profitability.
1. Moving past expensive customer onboarding
In many cases, restaurants don't have a technology platform. Getting them to consider choosing Toast is a tall order. The company's biggest operating expense, therefore, is sales and marketing.
According to Toast's management, however, the business has a flywheel -- something that picks up sustainable momentum with growth. In markets where the company can get 20% market share, its win rate goes up. In other words, its marketing spend gets more efficient.
It would appear that as restaurants see more of their peers using Toast, they too opt to give it a try. And 20% market share seems to be a tipping point. Therefore, it's possible that Toast can become more profitable with continued growth as marketing spend gets more efficient. It's something worth watching, for sure.
2. Improvements to its cost structure
Turning to margin opportunities identified by management, Toast CFO Elena Gomez says the company can make its cost structure better. In other words, it can invest in its business to reduce its cost of doing business, which would boost profits.
There are examples of other technology companies that have successfully done this. For starters, consider advertising-technology company PubMatic. The company invested money to own and operate its own infrastructure. In the third quarter of 2023, this led to a 9% year-over-year decrease in its cost of revenue per million ad impressions.
There are other ways companies can improve their cost structure. For example, cybersecurity identity company Okta hired more people in countries where labor is cheaper and got rid of some unnecessary real estate. The company's cash flows are consequently soaring with free cash flow hitting a record $150 million in the most recent quarter.
Data by YCharts.
Other companies have improved their cost structures and gotten great results. It's still unclear exactly what Toast will do, but an effective blueprint already exists.
3. Price increases
Finally, Gomez also says Toast can increase its prices for its subscription software services. Investors should understand that such a move would basically go straight to the bottom line. When one charges more for the same service, profits go up.
Of the options to improve its profits, this is the one I'm most skeptical of for Toast. Last summer, the company put a $0.99 fee on all restaurant orders over $10, and the move was so unpopular Toast had to completely backtrack just a couple of weeks after announcing it.
Adding a fee on all orders isn't exactly the same thing as raising its prices. However, I believe it illustrates a greater point: The restaurant-technology space is competitive, and raising prices won't be easy.
What it all means for investors
When investors buy a stock, they're essentially betting on the company's future cash flows. However, predicting future cash flows is difficult -- there's not a magic formula or foolproof stock screener that can guarantee success.
Toast could ultimately fail to improve its profitability in coming years, but considering the company's growth is still strong and its market opportunity is so large, this is a stock worth considering for your portfolio in anticipation of improved profits over time.
