Toast (TOST -0.52%) unexpectedly turned a profit in the second quarter, but its shares were still unable to gain any traction following its strong results and increased guidance. Shares of the cloud-based restaurant management software company are up over 25% year to date, but well off its recent highs.
Let's look at the company's most recent quarterly results, future prospects, and valuation to see if this is a good time to buy the beaten-down stock.
Increased guidance once again
Toast's Q2 revenue rose 27% to $1.24 billion. Subscription revenue climbed 37% to $166 million, while financial technology revenue rose 27%. Its annual recurring revenue (ARR), which consists of its subscription revenue and its fintech gross profits annualized for the entire year, jumped 29% to $1.5 billion.
Toast's gross payment volume (GPV), which is the payments the company processes for its restaurant customers, rose 26% to $40.5 billion. The total number of locations using its solution grew 29% to 120,000, with the company adding 8,000 new locations in the quarter.
Toast has started to expand internationally and reached 2,000 international locations in the U.K., Canada, and Ireland in the quarter. It also said that it is seeing success in newer verticals such as enterprise restaurant chains and food and beverage retailers.
Earnings per share (EPS) came in at $0.02 versus the $0.02 loss that analysts had projected. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), meanwhile, rose from $15 million a year ago to $92 million. It generated operating cash flow of $124 million, with free cash flow of $108 million.
Toast raised its full-year forecast for both revenue and adjusted EBITDA once again. It now projects subscription services and fintech gross profit to be in a range of $1.34 billion to $1.36 billion, representing 27% to 29% growth. Adjusted EBITDA is now expected to come in between $285 million and $305 million.
Toast previously guided for subscription services and fintech gross profit to be in a range of $1.325 billion to $1.345 billion with adjusted EBITDA between $250 million and $270 million. It originally guided for subscription services and fintech gross profit of between $1.3 billion and $1.32 billion and adjusted EBITDA to be between $200 million and $220 million.
For the third quarter, Toast is looking for subscription services and financial technology solutions gross profit to grow by 23% to 27% to between $345 million and $355 million, with adjusted EBITDA of between $70 million and $80 million.
Image source: Getty Images.
Should investors buy the dip?
Toast is doing a nice job balancing growth with expense controls, leading to an unexpected profit in the quarter as well as soaring adjusted EBITDA and strong cash-flow generation. The company continues to do a great job adding new locations, setting a record in the quarter, while it also starts expanding internationally and adding customers in adjacent categories, such a food retailers.
At the same time, Toast continues to innovate and invest in its products. As it enters the retail food and beverage market, it will look to add important features such as supporting SNAP and EBT, along with deli management. This is another nice opportunity that the company has in front of it and it appears to be off to a good start. As Toast continues to innovate across its tech and payments stack, potential price increases should also be another driver for the company.
I believe the best way to value Toast is based on its projected 2025 ARR, as its fintech revenue has a low gross margin. ARR is more akin to the high-margin revenue generated by software-as-a-service (SaaS) companies and is a better metric than valuing the company off its sales. Assuming 25% ARR growth next year to around $1.7 billion and an enterprise value (EV) of about $11.9 billion, which takes into account its $1.2 billion in net cash, the company trades at an EV-to-ARR multiple of 7 times. That's an attractive valuation given its growth and prospects.
While there are some near-term worries about the economy and the impact it will have on restaurant spending, Toast remains well-positioned over the long term. As such, I would be a buyer of the stock on this current weakness.
