Last year marked another fantastic showing for the stock market. The S&P 500 (^GSPC +0.26%), viewed as the most important benchmark, was up 23% in 2024, capping a historic two-year run. It's hard to argue with these returns.
But investors saw even better gains from one supercharged stock that doubled last year. The hope for shareholders is that the momentum can continue. Can Toast (TOST +1.21%) rocket higher in 2025?
Strong fundamental performance
Besides a favorable market environment, Toast's stock benefited from the underlying business, which produced impressive financial results. Through the first nine months of 2024, the company posted 26% year-over-year revenue growth. This was boosted by the addition of 21,000 net new restaurant clients during that time.
The leadership team historically wasn't particularly focused on profitability, as growth was the main focus. But Toast looks to be upgrading its financial position. It reported $56 million of net income in Q3, a huge improvement compared to the $31 million net loss in the third quarter of 2023.
While the top line rises at a brisk pace, expense growth has been under control. The business spent 11% cumulatively more on sales and marketing and research and development in Q3 versus the year-ago period. But general and administrative costs were down 8%. It's encouraging to see Toast not cut in areas that could support its growth while trimming what might be bloated corporate overhead.
NYSE: TOST
Key Data Points
Mission-critical partner
Toast provides cloud-based financial services and software to restaurants to help them operate more smoothly. The business offers a long list of products. As customers sign up for more options, they essentially become locked in, with high switching costs discouraging them from changing providers.
What's more, Toast shows how it can actually improve the financial performance of its customers. One restaurant was able to cut the time it took to run payroll by 90% while also delivering more orders to its customers in under 10 minutes.
The company proves that it is a mission-critical partner for its restaurants. The value proposition is certainly noteworthy, as it has led to strong word of mouth. An impressive 20% of new customers come from referrals, while 75% come from inbound marketing channels. Only businesses that offer superior products and services can have this type of success.
To be clear, there is competition in the space, from players such as Block, Clover, and Lightspeed. But Toast has undeniably carved out a successful niche, as it has a 14% share of all restaurant locations in the U.S., which is a sizable chunk. That penetration rate has rapidly grown over time.
Bullish fever
Toast shares jumped 100% last year. Investors should be aware of the bullish fever surrounding the company. That's still true, even with the stock trading 17% off its 52-week high from the end of November.
That share-price gain was propelled by an expanding valuation. The price-to-sales ratio soared 66% in 2024. And it now sits at 4.4. That's a clear indication of the market's enthusiasm toward Toast, which has resulted in heightened expectations.
But I'm not exactly sure the stock is overly expensive today. Because Toast is now turning the corner toward consistent profitability, investors can expect the forward price-to-earnings ratio of 40.6 to come to a conclusion.
Given Toast's growth trajectory, the valuation looks reasonable. Wall Street analysts forecast 23% and 20% revenue growth in 2025 and 2026, respectively. Earnings per share are expected to increase from a $0.47 loss in 2023 to a $1.24 profit in 2026. That's a positive outlook.
Despite the fact that Toast deserves a closer look for your portfolio, investors shouldn't expect the stock to rocket higher in 2025. In other words, another 100% gain is most likely not in the cards. So, investors should temper their bullishness in the near term.
