Toast Inc. (TOST, Financial) is a cloud-based software company that helps restaurants run their operations.
The company's debut was in the fall of 2021, when tech stocks were smoking hot. It got an initial valuation of over $30 billion, but has since come down to a more reasonable level.
Toast’s business model is to provide a software-as-a-service, all-in-one digital platform for restaurants that covers various aspects of their operations, such as online ordering, payment processing, loyalty programs and staff management.
The company is broken up into four segments:
- Subscription services: Toast charges monthly fees for its software products based on factors like location, employees, transaction volume, hardware and software purchased. These fees are recurring.
- Financial technology solutions: The company earns commissions on transactions and fees from marketing and collecting working capital loans for restaurants. These fees are recurring.
- Hardware: Toast sells devices and accessories for its point-of-sale system, such as terminals, tablets and other handheld devices.
- Professional services: The company provides setup and training services for restaurants that use its platform.
Revenue growth depends on its pricing, take rate and number of locations. As a sort of enterprise system, Toast benefits from network effects since it connects restaurants with their customers, suppliers, delivery partners and other stakeholders. Additionally, when a restaurant adopts the software, the applications become sticky as employees are trained to use the system and processes are built around it. This makes it difficult for another competitor to come in and try to replace the system.
Financials
Toast's revenue has been growing rapidly, but is still in its early stages. The company is targeting a vast total addressable market as the restaurant industry is one of the biggest in the world and has lots of small and medium-sized players who have yet to digitalize their processes beyond point-of-sales systems.
The company's quarterly figures since its initial public offering are as follows. It should be noted that revenue growth is very high.
| 2022-12 | 2022-09 | 2022-06 | 2022-03 | 2021-12 | 2021-09 | |
| Revenue ($M) | 769 | 752 | 675 | 535 | 512 | 486 |
| Revenue Growth (YoY) | 50.20% | 54.73% | 58.45% | 89.72% | 111.22% | 105.27% |
| Net Margin | -12.87% | -13.03% | -8.00% | -4.30% | 0.20% | -52.26% |
| Ebitda | -93 | -79 | -93 | -17 | 7 | -48 |
| Ebitda Margin | -12.09% | -10.51% | -13.78% | -3.18% | 1.37% | -9.88% |
| Cash Flow from Operations ($M) | -19 | -69 | -21 | -47 | -31 | -18 |
| Free Cash Flow ($M) | -29 | -80 | -30 | -50 | -34 | -22 |
| Net Income ($M) | -99 | -98 | -54 | -23 | 1 | -254 |
Toast is still operating at a loss given high spending on sales and marketing as well as stocked-based compensation.
Currently, the company's Ebitda and cash flow are negative. Last year, the company went through nearly $300 million (which included $238 million in stock-based compensation). As of Dec. 31, the company had just $547 million in cash and cash equivalents. As a result, the company has a decent runway to achieve profitability, but shareholders should expect 3% to 5% dilution per year given the high amount of stock-based compensation.
Competition comparison
The company's closest publicly listed POS competitor is Lightspeed Commerce Inc. (LSPD, Financial), which has implemented its product in restaurants and other retailers. Many large restaurant chains have their own proprietary products, but smaller players have limited choices available to them. Wix.com Ltd. (WIX, Financial) and Shopify Inc. (SHOP, Financial) are more general purpose e-commerce companies, while Presto Automation Inc. (PRST, Financial) is a more specialized hospitality technology company. While there are some smaller privately held competitors, Toast is the only one operating at scale and focused on the restaurant industry.
Given that it is an early-stage company, the best method of comparison in regard to valuation is the price-sales ratio. At 3.63, Toast's price-sales ratio compares well with other e-commerce companies. I feel that the ratio is reasonable as compared to other SaaS and e-commerce players as well. However, the majority of Toast's revenue is derived from fintech and not software subscriptions. Fintech revenue's gross profit is typically less than that of a software subscription.
| Symbol | TOST | WIX | PRST | SHOP | LSPD |
| Company | Toast Inc. | Wix.com Ltd. | Presto Automation Inc. | Shopify Inc. | Lightspeed Commerce Inc. |
| Current Price ($) | 18.95 | 82.06 | 3.52 | 41.70 | 15.63 |
| Market Cap ($M) | 9,867.99 | 4,824.03 | 180.08 | 53,234.36 | 2,356.77 |
| Enterprise Value ($M) | 9,203.96 | 4,939.99 | 204.35 | 52,016.34 | 1,656.63 |
| Revenue ($M) | 2,731.00 | 1,366.04 | 22.67 | 5,599.86 | 692.84 |
| Cash Flow from Operations ($M) | -156.00 | 4.96 | -34.69 | -136.45 | -92.99 |
| PS Ratio | 3.63 | 3.61 | 7.24 | 9.44 | 3.43 |
| PB Ratio | 8.98 | 0.00 | 0.00 | 6.46 | 0.92 |
| EV-to-Ebitda Ratio | -32.64 | -96.29 | 5.74 | -14.76 | -6.20 |
| Ebitda Margin (%) | -10.33 | -3.74 | 225.01 | -63.06 | -38.00 |
Dual-class share ownership structure
The company has a dual-class share structure. The Class A common shares are traded on the market, while the Class B shares are held by insiders. Each Class B share has 10 times the voting power of an A share. This effectively means the company is controlled by insiders, whose interests may not be fully aligned with common shareholders.
Conclusion
Given the rapid quarterly revenue growth (still over 50% year over year) and huge total addressable market, Toast is an intriguing option for growth investors. The company's offerings are very sticky and benefit form network effects.
Further, once a restaurant's staff is trained on the system and the processes have been built around it, it will become difficult to switch services. If multiple businesses in an area use the same platform, they also benefit from having more trained staff available to hire. Toast also has a "land and expand" strategy. Once an initial module is in place, it can then sell additional modules to a customer. The company is clearly addressing a real customer need, as evidenced by the strong growth.
On the downside, Toast operates in a highly volatile sector as restaurants open and close all the time. This means sales and marketing expenses will likely remain high. Stock-based compensation is also high and will likely remain so given the company's growth and dual-share structure.
While the stock is substantially down from its high, it has been rebounding so far in 2023. Given lack of earnings, the stock's momentum depends on quarterly revenue results. As such, I am keeping an eye on Toast.
