2023-10-24 09:51:12 ET
Summary
- Toast, a restaurant PoS software provider, has reached over $1 billion in annualized ARR and is expanding its services.
- Toast is aiming to become the software management platform of choice for restaurants, with a TAM of over $100 billion.
- Despite market volatility, Toast's revenue and customer base continue to grow, and the company is approaching profitability.
- Initiating Toast stock with a Buy rating.
Amid extreme market volatility over the past few months, it's good for investors to put aside their fear hats and look at recent trends as an opportunity, especially where interest-rate fears have heavily dented high-potential growth stocks that are just starting to turn a fundamental corner. Be on the lookout for these names and be ready to pounce on dips.
Toast ( TOST ) is a stock I've recently delved into and am incredibly confident on. The well-known restaurant Point of Sale software provider has just notched over $1 billion in annualized ARR, while also expanding beyond payments to become a more holistic management system for the restaurant industry.
I'm initiating Toast at a buy, and given recent volatility since July has wiped out all of Toast's YTD gains (at one point the stock had been up more than 50% on the year), I think now is a great time to buy - because the company's results have seemingly not suffered at all as it reached new milestones in the back half of the year.
The bull case for Toast
Rule #1 when investing in mid-cap growth stocks, of course, is market potential. And in that regard Toast is not at all lacking, as the company sports what it believes to be a >$100 billion TAM:
Toast TAM (Toast Q2 investor presentation)
The key to this enlarged TAM, beyond capturing more restaurants and expanding more globally beyond the U.S., is that Toast is also working on building a more holistic restaurant management software platform. Though the large bulk of Toast's revenue currently sits in payment processing (which carries a much lower margin than subscription software, as the company splits interchange fees), it has broadened its suite of products for restaurants, including software for payroll and work scheduling, adding location and inventory management services, and offering tertiary products like gift cards.
Toast platform (Toast Q2 investor presentation)
Here, in my view, is the full bull case for Toast:
- Dramatic opportunity to expand both geographically and horizontally- Toast is no longer just a specialized PoS system for restaurants; the company is aiming to be the software management platform of choice for restaurants, which positions it well versus more generalized competitors like Square. Overall, Toast has estimated its TAM at $110 billion, which indicates less than 1% current penetration.
- Cross-selling momentum is deepening- More to the point above, more than 40% of Toast customers are now using six or more Toast products, versus a rate in the mid-20%s two years ago.
- Holistic platform that empowers hybrid service models- Toast no longer serves only dine-in, either. The company's software helps businesses manage takeout orders and even larger corporate catering events.
- Reaching the cusp of profitability- Greater revenue mix into software as well as growing economies of scale are also helping Toast approach adjusted profitability for the first time
There's a lot to like here, especially as Toast is still seeing rapid growth rates.
Recent trajectory showcases a business that is seemingly impervious to current macro conditions
Many companies in the two verticals that Toast occupies: software as well as consumer-oriented services - are citing deep struggles with the current macro situation. But you wouldn't be able to tell that Toast is in a recessionary environment.
Toast top-line trends (Toast Q2 investor presentation)
The chart above showcases that Toast's total revenue grew 45% y/y in its most recent quarter to $978 million, beating Wall Street's expectations at the time of $945 million (+40% y/y). Growth has also barely decelerated from the ~50% range over the past several quarters. Gross profit dollars also continue to scale nicely, driven by both economies of scale as well as more value-added software sales.
Toast also managed to land a record number of new locations (over 7,500) in the quarter, demonstrating continued strong momentum at a time when many other software companies are reporting difficulties with new business acquisition. The company prides itself on its hyper-localized, primarily word-of-mouth go-to-market strategy.
Toast new location adds (Toast Q2 investor presentation)
But it's not like the company is only winning small, single or limited-location deals either. In Q2, the company won a giant global deal with Marriott Hotels. Per CEO Chris Comparato's remarks on the recent Q2 earnings call :
A core tenet of our product strategy is to position our platform to expand deeper into the TAM. Toast for Hotel Restaurants and our expanding enterprise capabilities were key in unlocking the Marriott opportunity. The deal we announced enables our team to sell the Toast platform to Marriott Select Service Hotels in the U.S. and Canada.
There's a range of food and beverage service models across Marriott Select Service properties, from full-service dining to quick service, to poolside ordering. The flexibility of our platform to meet the unique needs of different restaurant sizes and formats in the select service level was another important differentiator for Marriott.
While it's still early, we've taken a small number of Marriott locations live already and we look forward to bringing the power of our platform to more Marriott properties moving forward and continuing to go deeper in the enterprise segment."
Marriott's contribution to Q2 results was still minimal, so we should expect to see this deal roll through the company's financials in Q3 and beyond.
Toast is also rounding a corner on profitability. Adjusted EBITDA margins in the quarter reached positive 1.5%, a 600bps improvement versus the year-ago Q2:
Toast adjusted EBITDA trends (Toast Q2 investor presentation)
Key takeaways
With a massive global TAM, fierce double-digit growth rates, recent momentum in signing large enterprise deals, and a diversifying product portfolio that helps cement Toast's leadership position in the restaurant category versus generalist competitors like Square, there's a lot to like about Toast.
Use the recent dip as a buying opportunity and hang on tight for a rebound.
For further details see:
Toast: Just Starting To Lift Off