The ongoing bull market may now be official, but that doesn't mean that there aren't still plenty of bargains to be had among stocks. After the tech stock crash of 2022, many promising names are still down sharply from their 2021 peaks, which spells opportunity as investors brush off concerns about a recession, and interest rates are expected to come down later this year.
If you're looking for stocks trading at a discount, keep reading as two Motley Fool contributors provide information on two tech companies -- Toast (TOST 3.42%) and Pinterest (PINS 4.04%) -- that look like steals right now.
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How Toast is redefining restaurant management software
Anders Bylund (Toast): I don't always order food from local restaurants. But when I do, I run into the Toast logo a lot.
The restaurant management software specialist has made a solid mark on the food service industry in Tampa Bay where I live (as well as around the country). The company's preferred marketing method is to select a couple of hotspots at a time, send in a swarm of salespeople and product demo people, and enjoy robust word-of-mouth assistance when the first few wins in each market lead to happy customers.
It seems like an easy sell. Toast's platform performs many functions under a unified software umbrella, from payment processing, inventory management, and menu creation to order-taking and data-driven marketing proposals. Most restaurants rely on many different tools from several vendors when they don't resort to spreadsheets or handwritten notes. But with Toast, every part of the system is built to support everything else, so servers can recommend dishes based on an inventory glut of shrimp and garlic, and the manager can tailor social media posts or mailer ads around the most popular sandwich in each neighborhood.
Plus, the company sells hardware, such as credit card readers and order-taking tablets below cost, giving cash-strapped upstarts another good reason to try this solution. This way, the hardware line serves as another marketing tool.
All in all, Toast refers to this strategy as a "localized go-to-market approach" centered around "flywheel markets" with more than a 20% share of the local small and medium restaurants sector. It's an effective approach. The company added 6,500 new customer locations in the fourth quarter of 2023, adding up to a 34% gain compared to the year-ago period.
Toast is expanding in several dimensions at once.
- The company signed larger chains, such as Caribou Coffee, Romano's Macaroni Grill, and Jersey Mike's Subs, over the last year, signaling an ambition to serve larger clients as well.
- Toast's annual research and development (R&D) budget has jumped 160% higher over the last year and a half, supported by a 226% revenue increase. Recent product introductions include catering services, mobile apps for managing the whole restaurant system, and support for selling retail items (think T-shirts and wine bottles) alongside the food service experience. A broader feature catalog should result in higher revenue per customer over time.
- The localized go-to-market idea is going abroad, too. Toast has tested small pushes into parts of Canada, Ireland, and the U.K. so far, targeting a global footprint many years down the road.
Despite this ambitious and successful growth strategy, many investors have focused on missteps like the unwelcome introduction of payment processing fees last fall. Others avoid the stock due to its lack of bottom-line profits. But nobody said that winning was cheap. Toast combines the cost-cutting powers of word-of-mouth marketing with the more costly hardware strategy.
And the result is a fantastic growth business, still in the early days of a long-term expansion strategy. Toast seems to have crossed Tampa off its list of "flywheel markets" already, landing both newer names and old favorites on that message-amplifying client list. Feel free to ignore this anecdotal success story, but keep an eye on the Toast brand wherever you go.
So the stock trades more than 20% below its 52-week highs and 65% down from the first few weeks on the market -- coincidentally right at the start of the inflation panic in 2021.
With its stock price substantially below peak levels, Toast offers high-quality investment potential at a discount. This is pretty much the only stock I'd consider buying in the restaurant-related sector right now.
Pinterest is coming back
Jeremy Bowman (Pinterest): Like other social media stocks, Pinterest was a big winner during the pandemic. With much of the world stuck at home, users flocked to its app and website to get information on everything from cooking to children's activities to home renovation tips.
However, in the economic reopening, users returned to away-from-home activities, and its user base declined for several quarters. Now, that trend seems to be passing. User growth has returned. Revenue growth is accelerating, and advertisers are looking to spend again after scaling back in 2022 and 2023 over fears of a recession.
Pinterest stock sold off on its fourth-quarter earnings report, but the results were solid. Monthly active users were up 11% to 498 million, with growth in all three of its regions. Revenue increased 12% to $981 million, and it reported a generally accepted accounting principles (GAAP) net income of $201 million, showing the business can be highly profitable as it scales. The fourth quarter is the seasonally strongest of the year, and the company did report a slight net loss for the year, but the business is trending in the right direction on both the top and bottom lines. The company expects revenue growth to accelerate to 15% to 17% year over year in the first quarter, with just 9% to 13% growth in non-GAAP operating expenses, indicating solid margin expansion.
Pinterest is a unique property in social media as its platform focuses on self-improvement rather than social connection, and its users tend to like seeing ads as they are often looking for products related to fashion, adventure, or whatever their topic of interest is.
With digital advertising demand on the rebound and Pinterest's margins expanding, now looks like a great time to scoop up shares of the stock, down 60% from their peak in 2021.
