Shares of Toast (TOST 0.12%) have been hot lately. The stock has gained 34% in a year, with a 72% gain from a deep price dip last November.
But that's all in the rearview mirror. Astute investors should ask whether Toast can find more butter in the years ahead. Is it too late to buy into this restaurant management software specialist?
Toast by the numbers
This stock sends mixed messages to data-driven investors.
- The stock has posted strong gains recently, as noted above. It trades at the lofty valuation of 39 times forward earnings estimates and 139 times free cash flow. Other profit-based valuation ratios aren't helpful since most of the company's profit metrics have been negative over the last four quarters. From this view, Toast looks quite expensive.
- On the other hand, price to sales (P/S) stands at a perfectly reasonable value of 3.2. And if you zoom out to a long-term view, the share price is down 64% from its all-time peak in November 2021. In that light, Toast seems affordable or downright cheap.
But those headline numbers don't tell the whole story. You should also know that Toast's business is growing in all the right places. Top-line sales jumped 35% year over year in the fourth quarter of 2023, for example. Gross profit rose at a quicker 42% pace thanks to expanding gross margins.
Moreover, the cash flow valuation appears unusually high because Toast's trailing cash flows have only recently surpassed the breakeven point. This recent shift can distort valuation ratios, particularly when the denominator in these calculations -- recently negative or very small -- suddenly increases:
TOST Revenue (TTM) data by YCharts. TTM = trailing 12 months.
The big business idea
Toast sells a sophisticated cloud-based software suite to help with pretty much every aspect of running a restaurant (or a chain of food service locations). From payment processing and menu management to tracking ingredient inventories and creating the right marketing strategy based on local sales details, Toast does it all in a tightly integrated package.
This one-stop shop usually replaces several software solutions from different vendors, each focused on just one piece of the restaurant puzzle, and the pieces aren't made to fit together. Having the operating data flow seamlessly from real-time transaction inputs to every other part of the business makes the job easier, and Toast's single package also tends to be more cost-effective than several stand-alone solutions.
So, it's no surprise to see Toast's solutions pop up in many sit-down dinners and takeout lunch breaks. Keep an eye out for the Toast-branded order-taking tablets, which the company sells below cost, effectively making the hardware part of Toast's marketing effort.
I've seen the brand in Tampa-area coffee shops, Greek gyro chains, full-service Italian restaurants, and more. The Toast clients include single-store family businesses, area-spanning chains, and everything from brand-new businesses to names with decades of operating history.
Image source: Getty Images.
It may be a different story in your neck of the woods since Toast focuses its expansion efforts on specific target markets. Send out a large team of sales reps to try out hardware in a certain city and keep the marketing effort going until a growing number of happy customers start to build buzz on the streets. It's time to move on to the next city once the word-of-mouth promotion machine is up and running.
It adds up to an effective growth engine that only recently switched into a cash-generating mode and should deliver stronger profits as the business scales up. In other words, I don't think you're late to the Toast party at all. The company stares down a massive target market, and its tremendous early growth is just the start of a long and shareholder-friendly growth story.
