If you look hard enough, you can still find quality businesses to buy. Toast (TOST +2.04%) in particular just reported financial results that the market cheered for, with shares jumping 13% immediately following the announcement.
If we dig a bit deeper, there's a lot to like about this company and the direction it's headed in, even though the growth stock is down 58% from its all-time high. Here's why it's still a smart buy right now.
Penetrating a massive industry
At a high level, Toast caters to the specific needs of restaurants. This means providing hardware and software solutions to handle things like payment processing, omnichannel ordering, loyalty programs, employee payroll, and accounting. Toast is essentially a leading operating system provider for owners and operators, with the goal of making running a restaurant as seamless as possible.
The good news is that the opportunity for Toast is truly massive. There are 860,000 restaurant locations in total in the U.S., of which 112,000 are already customers of the business. That figure increased 32% year over year. If the business can make sizable progress in international markets, then the expansionary runway is even larger, as there are 22 million restaurant locations worldwide.
Revenue was up 31% in Q1, totaling $1.1 billion. That was better than Wall Street consensus analyst expectations. Just three years ago Toast posted sales of $282 million in the first quarter of 2021, so it's clear that the company is catching on with restaurants.
Management's goal is to drive greater recurring revenue, from things like subscriptions and payments, in order to add more stability and predictability to the operations. On an annualized basis, this segment raked in $1.3 billion in sales, 32% higher than Q1 2023.
NYSE: TOST
Key Data Points
Get to the bottom line
Toast's growth is nothing short of impressive, especially when you consider the uncertain economic environment we are in. However, the business leaves much to be desired when it comes to the bottom line's performance. In the latest quarter, Toast reported a net loss of $83 million, about in line with the year-ago period.
I'm typically skeptical of companies that aren't generating consistent profits. In my mind, this adds a lot of risk for investors because it demonstrates that the business model hasn't yet proven itself. Moreover, it's always difficult to tell exactly when positive net income will be reached.
I'm willing to give Toast the benefit of the doubt, though. The reason is that the company is developing an economic moat that stems from its clients having high switching costs.
Put yourself in the shoes of a restaurant owner. You, your team, and your customers are all fully well-versed in Toast's offerings. Things are running smoothly, and there haven't been any issues.
In this scenario, you likely aren't going to change to a rival's products and services, even if they might be cheaper. Imagine the messy process of transitioning away from Toast, while at the same time onboarding a new system. That seems like a daunting task.
This gives me confidence that Toast has staying power, particularly as its customer base remains somewhat locked in. Consequently, as revenue keeps rising at a rapid clip, the hope is that the business can eventually start to generate outsized profits.
Lots of upside
The market isn't asking investors to pay up for Toast. Shares trade at a price-to-sales ratio of 3.5, which is well below the historical average multiple of 4.7.
Given the moat I just discussed, coupled with a massive growth opportunity, Toast stock looks to have plenty of upside for long-term investors.
