The Federal Reserve recently kicked off what could be the start of a more accommodative monetary stance, as the benchmark interest rate was cut for the first time in more than four years. Investors might take this as a sign that it's time to take on more risk in their portfolios.
One way to do this is to consider buying growth stocks that have the potential to generate strong returns. In fact, there's one that's down 58% from its peak that investors should take a closer look at.
The backbone of the restaurant sector
Toast (TOST 0.31%) is a tech-enabled enterprise that offers point-of-sale hardware devices, as well as a wide range of software and financial services, that cater specifically to the needs of the restaurant industry. Notable services the business provides its customers with include marketing tools, the ability to handle various ordering channels, payroll, and inventory management.
Anyone familiar with how a restaurant operates understands just how complicated things can get. Even a customer waiting for their food at their table can figure out that there are many things happening at one time. Here's where Toast can be a savior, supporting a more seamless back-end system that helps the restaurant run more smoothly.
Toast company can be considered a growth stock, even though its shares are down from their peak. In 2021 and 2022, Toast registered top-line gains of 107% and 60%, respectively. Its product suite is certainly catching on with restaurant owners and operators.
While the company's growth slowed in recent times, it's still impressive. Revenue was up 29% in the first six months of 2024 on a year-over-year basis. This was partly driven by Toast adding 27,000 net new customers in the past 12 months, a rise of 29%.
It's easy to be optimistic about the company's long-term prospects. The business can count 120,000 of 875,000 restaurant locations in the U.S. as its customers today, which leaves lots of runway to continue expanding. Internationally, the opportunity is significantly larger. Toast will be helped by restaurants investing further into boosting their digital and technological capabilities.
Turning the financial corner
As a fast-growing enterprise, Toast's executive team has focused on directing all of its resources to adding new customers and increasing the top line. As a result, profits have not been a priority. However, things could be changing for the better.
Toast is now profitable on a GAAP basis, as it reported positive net income of $14 million in the second quarter (ended June 30). That's a major improvement from the $98 million net loss posted in the year-ago period.
Wall Street is optimistic that the bottom line will keep trending in the right direction. Consensus analyst estimates call for earnings per share to skyrocket 168% from a forecast $0.44 this year to an expected $1.18 in 2026. Shareholders can definitely get excited about this rosy outlook.
Software companies generally operate very scalable business models. That's because the expense structures are largely fixed. As revenue increases, net income has the ability to rise even faster. In this instance, Toast's management should focus on better leveraging its sales and marketing and research and development efforts, which will help it grow earnings.
Toast's valuation
Toast shares have been a winner in 2024 as they've jumped 55% through the first nine months. The market seems increasingly bullish on the company.
That doesn't hide the fact that the stock is still 58% off its peak, and this presents prospective investors with a compelling entry point. Shares trade at a price-to-sales ratio of 3.5, substantially below the historical average of 4.5. The valuation makes now a good time to buy.
