Shares of Toast (TOST +2.84%) climbed after the restaurant management software-as-a-service (SaaS) company reported strong third-quarter results and issued upbeat guidance. Even after the jump in share price, the stock is still up just over 7% on the year.
Let's dig into the company's recent results and future prospects to see if now is a good time to buy the stock.
NYSE: TOST
Key Data Points
Record location additions and upbeat outlook
Toast continued to nicely add new locations, bringing on about 7,500 new net restaurants in the quarter for a total of approximately 156,000 at period end, a 23% year-over-year increase. The company said it was seeing increased win rates, both in the quick-service restaurant (QSR) and full-service spaces.
It is also gaining traction with food and beverage retailers, large chains, and in international markets. It said combined, these newer verticals are on pace to end the year with annual recurring revenue (ARR) -- which consists of its subscription revenue and its fintech gross profits annualized for the full year -- of $100 million, and has the potential to be a $1 billion opportunity.
Some of its wins with bigger chains include TGI Fridays, which moved to the Toast platform in the U.S., and Nordstrom, which chose Toast for 200 dining locations in its department stores.
However, U.S. small- and mid-market restaurants remain its core customers, accounting for about 95% of its ARR. The company said it sees a clear path to doubling its locations and gross payment volume (GPV) in its core market over time.
Overall, Toast's total Q3 revenue jumped 25% to $1.63 billion. Subscription revenue climbed 29% to $244 million, while financial technology revenue jumped 26%. ARR, meanwhile, increased by 30% to $2 billion.
ARR is Toast's most important metric, given the sizable difference in gross margin between its subscription business and its fintech revenue. It was boosted by a 7-basis-point increase in its payment processing take rate to 98 basis points. Toast's GPV, which is the payments the company processes for its restaurant customers, meanwhile, rose by 24% to $51.5 billion.
Earnings per share (EPS) soared from $0.07 to $0.16 in the quarter. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), meanwhile, surged 56% from $113 million a year ago to $176 million.
Toast once again increased its full-year forecast for both revenue and adjusted EBITDA. It now projects subscription services and fintech gross profit to be in a range of $1.865 billion to $1.875 billion, representing 32% growth, with adjusted EBITDA between $610 million and $620 million.
| Metric | Original Forecast (February) | Prior Forecast (May) | Prior Forecast (August) | Current Forecast (November) |
|---|---|---|---|---|
| Subscription service and fintech gross profits (in billions) | $1.745 to $1.765 | $1.775 to $1.795 | $1.815 to $1.835 | $1.865 to $1.875 |
| Growth rate | 23% to 25% | 25% to 27% | 28% to 29% | 32% |
| Adjusted EBITDA (in millions) | $510 to $530 | $540 to $560 | $565 to $585 | $610 and $620 |
Data source: Toast.
For the fourth quarter, Toast is looking for subscription services and financial technology solutions gross profit to grow by 22% to 25% to between $480 million and $490 million, with adjusted EBITDA of between $140 million and $150 million.
Image source: Getty Images.
Is the stock a buy?
Toast shares dipped earlier this fall after the company mistakenly listed lower prices on its website, which led investors to fear that the company was lowering prices due to increased competition. However, it quickly rectified it when that came to light, and it noted that its win rate is increasing against all competitors.
The company said its pricing strategy remains unchanged and that it will make "targeted and surgical price changes" to help drive growth, adding that gaining share is a high current priority, but that it thinks it can optimize price over time.
Innovation has always been a hallmark for Toast, and it continues to integrate artificial intelligence (AI) across its platform to help its customers improve operational and marketing efficiencies. Along these lines, its products like Toast IQ and Toast Advertising are resonating with customers and seeing strong adoption. This helps the company also differentiate itself in a competitive space, and should help it continue to grow and take market share in its core market.
Meanwhile, it still has large untapped markets to go after internationally, as well as in adjacent markets, like food and beverage retailers.
Turning to valuation, I believe the best way to value Toast is based on its ARR, which for 2026 should climb to over $2.5 billion based on its current growth rate. Based on that, the stock trades at an enterprise value-to-ARR multiple of around 9, which, given its growth rate, is an attractive valuation. As such, even after the jump in share price, I think the stock still looks like a buy.
