My first W-2 job came at age 15 in a very fancy French restaurant, where during my first week I managed to spill water all over a couple celebrating their tenth anniversary. It was awful, but that summer taught me so much. While restaurants are complicated businesses with dozens of moving parts, one software company is transforming how they operate – Toast, Inc. (TOST), explains Adam Johnson, editor of Bullseye Brief.
TOST serves nearly 110,000 US restaurants with a hand-held point-of-sale (POS) order management system that has become the industry standard. The toast platform links waitstaff and kitchens in real time, but also manages inventory and payroll.
It’s comprehensive and fully integrated, condensing dozens of labor-intensive tasks to drive productivity and profits. Having IPO’d in 2021, Toast’s acceleration to #1 restaurant SaaS provider has been dramatic, yet the company has still captured just one-tenth of its target market. So, the upside has only just begun.
Toast offers a fully integrated software/hardware platform capable of managing nearly all aspects of a restaurant’s business. If you’ve ever seen a server enter your order on a handheld device at the table, and/or returned at the end of the meal to insert your credit card for payment, then you’ve seen the Toast front end.
It’s fun to observe and certainly saves waitstaff from running back and forth to the kitchen, but that’s just for starters. In addition to transmitting orders in real time, Toast tabulates how many ingredients were used at the end of the day and can automatically reorder for the next day. Toast can also handle reservations and payroll, and provide accountants with all the data needed at tax time.
Why Toast and why now? The short answer is because the company’s fundamentals are accelerating and its stock looks poised to break out. It’s also the biggest and best in the business. Drilling deeper, there are multiple reasons to buy Toast now:
- Revenue Growth – Consistent growth of 25-40% YoY ranks in the top 15% of large cap companies.
- Accelerating Profits – Q2 will likely mark the first quarterly profit, with EPS expected to grow triple digits 2024/5.
- Cash Flow Generation – Subscription model ensures consistent cash flow from quarter to quarter.
- Cloud Flexibility – Software is updated and serviced remotely via the cloud, driving margin efficiency at scale.
Despite so many positives, Wall Street is apprehensive to get fully behind the company. TOST trades at just $25, well below its 2021 IPO price of $40 and equal to 2.8 times sales.
If these figure sound cheap, they are. The company’s loosely defined peers trade at an average of 6.9 times sales. I’d also argue that the discount versus its IPO reflects angst around the economy and risk aversion given rate hikes. I think those headwinds are fast disappearing and Toast deserves to be judged on its merits going forward.
Recommended Action: Buy TOST.
