Is it really possible that a stock down 63% is worth buying today? Does that mean the investing community is getting something wrong?
Toast (TOST -0.06%) stock is reporting strong growth metrics, but its stock has plummeted. Let's see why it has been declining, what investors might be missing, and its plunging price could be an opportunity.
What does Toast do anyway?
Toast is a tech company that provides software-as-a-service (SaaS) solutions for the restaurant industry. It offers several tiers with hardware, software, payment processing, and more, with different tools and services targeting different types of restaurants like bakeries, cafes, and fast food. Toast's solutions combine all of a restaurant's management in one place with digital tools, data analytics, and payment services, which creates incredible efficiency, saves money, and speeds up operations.
Toast has been reporting high growth since it went public in 2021, and it's getting closer to generally accepted accounting principles (GAAP) profitability. Total revenue, as well as annualized recurring revenue (ARR), which gives a little more color into ongoing operations, both increased 35% year over year to $1.2 billion in the 2023 fourth quarter. Gross profits increased 43% over last year, outpacing revenue growth and leading to higher profitability. Net loss improved from $99 million in 2022 to $36 million in 2023 in the fourth quarter, and adjusted EBITDA of $29 million in 2023 increased from an $18 million loss in 2022.
The loss might still be concerning, but it's not unusual for a growth company. Management explained that it has experienced high growth over the past three years and is taking action to reduce expenses at this stage, including cutting 10% of its workforce. When a company scales, it invests in its growth. Throughout the process, it may need to rebalance to become more efficient. Toast is there, and this is an opportunity for the company to demonstrate that it can use its resources to grow efficiently.
Small niche, big opportunities
Toast increased its locations 34% year over year to 106,000 at the end of 2023. If that sounds like a lot, it sees the opportunity for 22 million locations globally. Its current serviceable addressable market is $15 billion, of which it has less than 10% in 2023 ARR, with a $110 billion total opportunity. It benefits from a strong network effect, and about 75% of new locations come from inbound channels. About 20% of new locations come from client referrals.
Aside from new locations and clients, Toast is targeting revenue growth through upselling, product innovation, and pricing action. It has several product tiers that offer combinations of its hardware and software, and there are multiple growth opportunities within its existing customer class.
Why is Toast stock down?
Despite its incredible growth over the past few years, Toast stock is down about 63% from its all-time highs. However, it's been climbing back up, and it's gained 40% over the past year.
Toast went public just before the previous bear market at the tail end of a year of record initial public offerings (IPOs). It came to market with a high valuation that wasn't necessarily justified, so it's not surprising that it went south when stocks in general tanked. Toast stock now trades at a price-to-sales ratio of 3, which seems perfectly reasonable for this high-growth stock.
Toast stock could skyrocket
As Toast continues to gain customers, generate high sales growth, and make sound decisions to scale efficiently, its stock should keep climbing. Investors aren't getting anything wrong here; they were too excited about IPO stocks when Toast went public, which was a setup for a fall.
At the current valuation, it looks like a good value. Toast could be an exceptional stock to own over the next few years with the potential to be a great long-term holding, and investors should consider buying Toast stock.
