Does Toast (TOST 3.42%) have any rocket fuel left in its tanks?
The restaurant management software expert's stock has gained 26% in less than three months, leaving the S&P 500 (SNPINDEX: ^GSPC) index far behind with an 8% gain over the same period. Moreover, the company isn't profitable and many investors shy away from its growth-oriented management style.
Yet, I keep recommending Toast's stock to anyone who might listen. And I won't stop now, because this modest jump looks like the beginning of a long-term uptrend.
In short, I see tremendous value in Toast's high-octane growth story and the stock has room to run much higher. Here's how.
Image source: Getty Images.
What Toast does differently
Many companies offer software solutions for restaurant management. Giants like Block (NYSE: SQ) and Fiserv (NYSE: FI) offer advanced point-of-sale systems and payment processing solutions. In staff management and payroll processing, many restaurants rely on Paychex (NASDAQ: PAYX) or the Gusto platform. For customer loyalty programs, a restaurateur might go with Paytronix, Incentivio, or Par Technology's (NYSE: PAR) Punchh.
You see where this is going. Toast faces highly competent rivals in all of its service categories, from marketing program management to inventory tracking -- but you rarely see the same names pop up in different categories. Some, like Fiserv's Clover and Block's Square-branded services, cross over into a couple of niches, but Toast does it all, with built-in access to the complete data set from every corner of the system.
Having all of these tools available under one digital roof is more than just a cost-effective solution. It also helps managers maximize the value of every data point. If the new spicy chicken sandwich is a big seller, Toast will keep the coolers stocked with all the right ingredients while suggesting an effective marketing approach to keep the bandwagon rolling. Chefs have displays in the kitchen, not only showing incoming orders but automating the ideal cooking times and firing orders.
If something can be automated, Toast is probably doing it for you already. Sales trends, customer preferences, and staffing schedules all have a bearing on the food service location's day-to-day operations, and Toast automates the cross-linked data access. Doing the same thing with a disjointed collection of software from different vendors (plus a few simple spreadsheets or even handwritten notes) may be possible, but Toast makes it easy.
But wait -- there's more!
Besides the company's unique full-service software solutions for customers, Toast runs its own business in a different way.
The company is in a high-growth phase so far, aiming every available asset at optimizing the adoption of its tools and services across the country. Tale as old as time, right? But Toast relies on two powerful growth boosters:
- Toast offers point-of-sale and order-taking hardware such as tablets and self-service stations. It sells these tools at a loss, essentially turning the hardware business into a marketing program. If a low-cost hardware setup gets your foot in the door, the award-winning software should keep the new customer happy and loyal for years to come.
- Rather than blanketing the country in marketing messages, Toast handpicks a few geographic areas of focus and goes full court press with its advertising and demo offers in these hotspots. A few successful rollouts in the same region builds a buzz among local business owners. Positive word-of-mouth chatter travels quickly when several new customers are spreading the word at the same time.
The negative earnings are a direct result of Toast's loss-leader expansion tactics. The company could raise its hardware prices to stem the bottom-line bleeding, but at the cost of dramatically lower sales growth and customer acquisition. That probably won't happen in the foreseeable future, which is why those bottom-line figures are printed in red ink.
Anecdotally speaking, Toast must have included the Tampa Bay region in a recent expansion effort. I don't pick my dinner spots by the location management platform, but the Toast name popped up in my three most recent dining experiences. I feel a little buzz every time it turns out that a local restaurant relies on the Toast platform. I'm not a shareholder yet, but it's kind of thrilling to see the my favorite growth stories play out in the real world.
So, is it too late to buy Toast in January, 2024?
No, that 26% stock price jump did not signal the end of the line. It's actually just a modest rebound from a deeply undervalued trough.
Toast's stock still trades 33% below its yearly highs and 72% below the all-time record of $65.22 per share, seen six weeks after the initial public offering (IPO) in 2021. Bearish investors focus on the lack of profits, ignoring both a skyrocketing revenue chart and improving profit margins:
TOST Revenue (TTM) data by YCharts
It's all part of a robust long-term growth plan, where a large user base should drive bottom-line profits far above the breakeven point in the long run. First, Toast's management is boosting the more flexible metric of adjustable earnings before interest, taxes, depreciation, and amortization (EBITDA), expecting a positive full-year figure in fiscal year 2024.
"We're scaling the business in a durable manner as we capitalize on the opportunity ahead of us to build a generational business that delivers significant value to our customers and shareholders," CFO Elena Gomez said in November's third-quarter earnings call.
I can get behind that vision. Truly wealth-building investments don't play out in a few quarters or a couple of years, but over decades of balancing growth prospects against appropriate profitability levels.
One of these days, I might pause my writing about Toast long enough to let me buy a few shares. Stay tuned, dear reader -- and feel free to invest in this exciting growth stock while I can't.
