Shares of Toast (TOST 1.41%) slid sharply last month after an analyst note from a Baird analyst on Sept. 22 pointed out that the company had slashed prices on some of its basic restaurant software packages by as much as 58%. Investors have recently become worried about increased competition in the space, and this news validated their concerns.
However, the price cuts apparently turned out to be news to the folks at Toast, too -- and not intentional. Once the company realized that the prices on its website had been lowered, it quickly restored them to previous levels. In fact, a few packages are now slightly more expensive than before.
The Baird analyst eventually retracted his note, but the damage to the stock was already done. This is the sort of thing that should have been cleared up with a phone call to management before publishing the report, especially since analysts typically have access to the management teams of the stocks they cover.
Despite the unwinding of those unintentional price cuts, the stock has not recovered, and therein lies an opportunity for investors to buy this solid growth stock. Nothing about Toast's business has changed because of a temporary pricing glitch, yet the stock continues to be punished as if the company were feeling real pricing pressure.
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Toast's Opportunity
Toast has built a popular operating system for restaurants, and now is increasingly incorporating artificial intelligence (AI) into its offerings. Its platform handles nearly every core management function for restaurants, including staffing, payroll, loyalty programs, menu planning, and marketing. The more of its modules a restaurant adopts, the more money Toast makes and the more ingrained in that location's operations it becomes.
Toast also collects a small slice of every payment that flows through its system, which ties its revenue directly to restaurant sales. That aligns its interests with those of its customers.
The company's growth has been strong. Last quarter, Toast added a record 8,500 net new locations, bringing its total to roughly 148,000, up 24% from a year prior. Subscription revenue jumped 37% to $227 million, while annual recurring revenue (subscription revenue and its payment processing gross profits annualized for the full year) reached $1.9 billion, up 31%. Adjusted EBITDA soared by 75% to $161 million, and management raised full-year guidance for both revenue and earnings. In other words, this isn't a company struggling to grow.
Moreover, Toast still has plenty of room to run. There are about 750,000 restaurants in the U.S., and many of them still rely on outdated legacy systems. Toast has been steadily gaining share and broadened its reach with tailored solutions for coffee shops, bakeries, hotels, and quick-service concepts. It's even started selling a solution to grocery stores. Each of these verticals adds new customers and more recurring revenue potential.
The company is also picking up steam outside of the U.S. It entered its fourth international market earlier this year when it launched in Australia, joining its operations in the U.K., Ireland, and Canada. Further global expansions are expected.
Time to buy the stock
Following the stock's recent pullback, and its failure to recover from it, Toast's valuation looks attractive. It trades at an enterprise value-to-ARR ratio of around 9 times my 2025 ARR estimate of $2.1 billion. The company's ARR is growing by close to 30% a year -- a rapid rate. For a leading software-as-a-service (SaaS) company with predictable revenue and a long runway for growth, that multiple looks cheap.
As such, this disconnect between the headline and the reality offers a rare chance to pick up a strong growth stock at an attractive price. My prediction is that this disconnect will not last too long, especially if the company posts strong Q3 results.
