When Block (XYZ 1.28%), which was formally known as Square, first introduced its credit card reader for mobile devices in 2009, it was a game changer. Businesses no longer needed anything special to adapt to the fast-changing payments space. With just a phone or tablet, they could accept digital payments, modernizing operations overnight.
Block has expanded into many things since then and is now valued at more than $40 billion. That's nothing to sneeze at. However, recent developments make me question how fast it will continue to appreciate in value. Because of this, I believe it's possible that relative newcomer Toast (TOST 0.72%) could become a more valuable company within five years. Here's why.
What game is Block playing?
As a longtime shareholder, I've grown increasingly unclear as to what Block's long-term vision is. At one point, it was quite clear: It had a segment targeting consumers with Cash App and a segment targeting businesses with Square. The company was actively launching new software products for both. But now, with its music platform, Tidal, and with Bitkey and Proto centered around Bitcoin, I'm not sure what it's truly focused on and what the upside is.
NYSE: XYZ
Key Data Points
To be clear, good things are still happening at Block. The company had $8.9 billion in gross profit in 2024, which was up 18% year over year (for Block, this can be a better metric than revenue because low-margin Bitcoin revenue is big and can fluctuate wildly). That's a good growth rate. The business was profitable, with $892 million in operating income. This is all encouraging.
However, in a letter to shareholders, Block's co-founder and CEO, Jack Dorsey, said that it was actively changing its business in 2024. In other words, investors should expect this company to look different in 2025 and beyond. With merchants, it's focusing less on payments and more on building a software platform for "neighborhood" businesses. With consumers, it seems like it's aggressively pursuing lending and credit services.
Block will face plenty of competition in the software space if it goes after large business customers. However, perhaps it intends to go after smaller businesses, which might not be as lucrative. Either way, I'm not sure how profitable this pivot will be. Additionally, I'm not sure how good of an idea it is to pursue more lending services to consumers when inflation is still running hot and many are struggling to pay the bills.
In summary, I've held Block stock for a long time, and I believe it has potential. But recent changes in the company could limit its upside potential in coming years. This could leave the door open for Toast's value to surpass Block's value.
Why Toast is a compelling investment idea
It's interesting that Block specifically talked about marketing itself to neighborhood restaurant companies because the restaurant space is precisely the market that Toast serves. But when it comes to gaining new restaurant customers, Toast has quite an efficient path forward.
NYSE: TOST
Key Data Points
In 2024, a record 28,000 new restaurant locations started using Toast's services. The company provides hardware for ordering and processing payments as well as software to manage almost everything related to running a restaurant. There are now 134,000 restaurants using its products. This led to a strong 28% jump in full-year revenue.
Looking at the list of operating expenses, however, Toast spent less than 10% of its revenue on sales and marketing. Sales and marketing expenses in 2024 were up just 17% from 2023.
In other words, Toast spent 17% more to grow its business. However, compared to a 26% increase in restaurants and a 28% increase in revenue, it was money well spent.
For some time, Toast's management has talked about a flywheel effect with its business. In its more established markets, it gets increasingly easier to win new customers. Its existing customers tend to become brand ambassadors, helping to boost its growth and lowering the need to spend on marketing. This claim from management certainly seems to have at least a degree of truth.
The benefit to investors is twofold. First, Toast appears to be getting less risky as it grows. After all, the more restaurants that use its services, the more that seem to want them. With only about 15% market share, there's ongoing room for new customers. Second, Toast is getting more profitable as it grows, thanks to efficiencies, with a full-year net income of $19 million in 2024 compared with a net loss of $246 million in 2023.
Toast's management expects double-digit growth yet again in 2025, and the long-term trends certainly seem favorable. At this rate, I wouldn't be surprised if the company doubled in value within the next five years. That would bring it up to the same valuation as Block today. Therefore, unless Block starts delivering better results for shareholders, Toast could feasibly become the more valuable company.
