ValueAct Capital Management made a name for itself as one of the top hedge funds in the industry. The fund invests in a concentrated portfolio of stocks, with a focus on high-quality businesses that it thinks are being undervalued by the market. Something it looks for in particular are good businesses whose stocks look mispriced because of "perceived unfavorable industry conditions."
While ValueAct establishing a large, new position in asset management firm BlackRock drew a lot of headlines, the hedge fund also made some other notable moves. One of the biggest was more than doubling its position in restaurant-focused software-as-a-service (SaaS) provider Toast (TOST 3.83%).
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Dragged down by the SaaS sell-off
Toast's platform serves as a way for restaurants to run their entire business more efficiently, from payment processing, payroll, and supply chain management to employee scheduling, customer loyalty programs, and more. The company has long been a leading innovator in the space, and more recently, it's added AI-powered tools to its platform.
ToastIQ can analyze a restaurant's data and give proactive insights, and even help with menu optimization to help drive sales. Its Sous Chef AI assistant can help with things like summarizing shift reports or helping servers suggest upsells, while it also offers an AI marketing tool to help drive business. Through its payment processing solution, Toast gets a small cut of sales, so it's able to participate in the success of its restaurant clients.
Toast continues to see strong adoption. It added 8,000 new net locations in the fourth quarter (a 22% year-over-year increase) and 30,000 for the year, to serve approximately 164,000 restaurants. However, with more than 700,000 restaurants in the U.S., and many still using outdated legacy systems, the company still has a long runway of growth in front of it.
Meanwhile, the company has been expanding into adjacent markets outside its core small- and medium-sized restaurant base with tailored solutions for quick-service restaurants, coffee shops, bakeries, hotels, and even grocery stores. It's also launched its solution outside of the U.S. and is starting to gain some traction in international markets.
NYSE: TOST
Key Data Points
Is the stock a buy?
Toast's stock got caught up in the SaaS sell-off, despite the company's continued strong growth. However, this is not a business likely to see any major disruptions from artificial intelligence. The business has always been highly competitive, and small restaurants aren't going to go out and create their own solutions. Meanwhile, as the leader in the space, the company still has a long runway of growth.
The stock trades at a very attractive valuation. From a valuation standpoint, I believe the best way to value the stock is based on its annualized recurring revenue (ARR), which, for Toast, is the combination of its annualized subscription revenue and the gross profits of its payment processing business. Based on its 2026 guidance for $2.3 billion in ARR, the stock trades at an enterprise value-to-ARR multiple of just over 6 times.
Given its growth and valuation, I'd be a buyer of the stock here.
