Americans who have dined in restaurants abroad have long been familiar with a waiter with a hand-held device taking their credit-card payment at their table. It’s in contrast to the largely U.S. ritual of handing over your card, sitting impatiently while the waiter punches the transaction into a point-of-sale system somewhere in the back of the restaurant, only to return with a paper receipt for you to sign.
U.S. diners are finally getting a taste of their international peers’ more seamless experience, thanks to next-generation providers like
(ticker: FISV) Clover,
(SQ) Square, and, in particular,
(TOST). Sleek terminals for taking orders and payments are the most visible features to diners, but Toast also has a suite of software that aims to act as an operating system for restaurants. It replaces analog or more labor-intensive processes throughout the kitchen and dining room, saving time and effort for staff and customers alike.
“The efficiency is definitely on another level,” says Criterion Thornton, a 30-year veteran of New York City’s restaurant industry and these days general manager at Ingas Bar in Brooklyn, a neighborhood tavern that offers seasonal menu items like duck poutine croquettes. “Just how intuitive the elements are is its real strength.”
Ingas uses Toast for ordering and payment processing, for its gift-card and rewards program, and for hours tracking and payroll management for its staff of about 30. Toast also offers tools for inventory management; digital ordering and delivery; working capital loans, and more. The company aims to be a one-stop shop for restaurants to incorporate technology into their operations to increase productivity and improve the experience for customers and employees.
Toast is powering the digital transformation of a staid industry with low profit margins and demanding customers. The company is 100% focused on restaurants, setting it apart from competitors like Square or Clover, which offer one-size-fits-all platforms. Its products are currently used by about 74,000, or some 9%, of the estimated 860,000 eateries in the U.S. It takes a percentage of each transaction it processes and sells subscriptions to its software services.
Toast hasn’t had an easy go of it in the stock market. Founded in 2011, the company completed its initial public offering in September 2021 at $40 per share, near the peak of the pandemic bull market. The stock rose as high as $65 in the following months before falling to as low as $12 last year. It has since recovered to the low $20s, giving Toast a market capitalization of about $12 billion, including net cash on the balance sheet of nearly $1 billion, or almost $2 per share.
That cash should be enough to cover Toast’s path to profitability. Analysts expect a cumulative net loss of about $600 million from 2023 to 2025 and net profits in 2026. Management expects Toast to reach profitability on Ebitda—earnings before interest, taxes, depreciation, and amortization—in 2023, while Wall Street forecasts a narrow full-year Ebitda loss but a gain in the second half. The Street sees revenue growing from $2.7 billion in 2022 to $6.7 billion in 2026.
That’s a lot of growth, and payments is a scale business—as more restaurants use Toast’s readers to process more transactions, profit margins will expand. Ditto for many of its software-as-a-service offerings. As Toast’s customer base grows, the cost to bring in new ones should shrink as a percentage of overall sales, and average revenue per user could increase over time as restaurants add more services.
“This is a classic example of a small company in the expensive land grab phase [of its growth],” says Gregg Fisher, founder and portfolio manager at Quent Capital, a global small-cap fund with about $1 billion under management. “There are a lot of acquisition costs to get a customer up and running, but once they’re there, they’ll be there for a while…. As Toast gets bigger, it’s going to become profitable.”
Toast’s most recent reported quarter shows that operating leverage: Total revenue was up 55% year over year, to $752 million, on 53% payments volume growth and 60% subscription growth. The company’s gross profit was up 82%, to $151 million, for a 20% margin. It burned $80 million of cash in the quarter.
That growth is on the back of more restaurants signing up and existing ones increasing their usage. About 62% of Toast’s customers used at least four of its subscription services—out of roughly 15 available—at the end of the third quarter, up from 46% two years earlier.
“We expect them to gain market share going forward,” says Wells Fargo’s Jeff Cantwell. “That’s a function of them having a very high-quality platform across software and payments. So we expect faster revenue growth than peers as well as the ability to expand profit margins as they grow.”
Cantwell expects Toast to earn a market share of 30% of small and medium-size U.S. restaurants, or nearly 200,000 locations, over the next five years. He rates the stock a Buy with a $27 price target, up 15% from Wednesday’s close. That’s based on 3.8 times Cantwell’s estimate of 2023 revenue, a premium to comparable software and payments companies like Block’s 2.2 times and
(LSPD) two times, due to Toast’s potential for faster growth.
Toast is a win-win for restaurants and their customers. While it hasn’t been for its public investors so far, its future looks more appetizing.
Write to Nicholas Jasinski at firstname.lastname@example.org