TOST

3 Reasons to Buy Toast Stock Like There's No Tomorrow

Retail investors are often more familiar with consumer-facing businesses because they could be direct customers of such companies. But that leaves a wide variety of companies that could be left undiscovered.

Toast (NYSE: TOST) could be one of them. The software-as-a-service company caters to the restaurant segment, providing a package of cloud-based tools that help owners and operators handle everything required for their locations to run smoothly. Those offerings are important to its clients.

Here are three reasons to be bullish and buy Toast stock like there's no tomorrow.

Toast has an economic moat

By focusing exclusively on restaurants, with their unique and complex needs, Toast has developed a strong niche product offering. Important features include point-of-sale devices, payment processing, payroll, online ordering, and marketing. By smoothing out all aspects of the restaurant business, Toast has become a mission-critical service provider to its customers.

Toast benefits from significant switching costs, providing it with an economic moat. Operating a restaurant is difficult by nature, considering the constant flurry of things one must manage at any given moment. That's why operators will view it as being of the utmost importance to have systems and software that are easy to use and work with minimal disruptions.

Consequently, I'd suspect that once a restaurant integrates Toast's tools into its operations, it will be unlikely to change providers. This gives the business protection against competitors like Block's Square and Clover.

In a world that is becoming more and more digitized, companies that can collect lots of data to direct management teams' strategic priorities also have an advantage. Again, Toast has the inside scoop on its customers' operations.

For example, by understanding what cuisines are more popular in what markets, what times of day people like to order various sorts of food, and whether delivery or dine-in is seeing strong demand, Toast can provide insights to its clients that can inform their pricing or marketing decisions, further boosting Toast's importance.

Between its switching costs and its data advantages, I'm confident that this business has staying power, making it a good long-term investment option.

Toast has huge growth potential

Toast is making a play for a piece of a massive market. According to executives, there are 860,000 restaurant locations in the U.S., of which 106,000 are already Toast customers. This leaves it a lot of runway for growth just domestically.

Should the business model transition well to foreign markets, the opportunity will be even bigger. There are 22 million restaurant locations across the globe. This gives Toast a total addressable revenue opportunity of $110 billion.

It's not surprising that Toast continues to put up strong growth numbers despite the uncertain economic backdrop. The business signed up 27,000 new customers in the last 12 months, helping it increase revenue by 42% in 2023. Encouragingly, in Q4, it reported a 35% increase in its annualized recurring run-rate revenue, which measures anything related to subscriptions and payments, making it a key metric that the leadership team watches.

It might be discouraging to prospective investors to know that Toast isn't yet profitable. But it is making improvements. Last year, the company reported a net loss of $246 million. This was an improvement from the $275 million loss posted in 2022. As is the case with all software-focused enterprises, it's all about achieving greater scale. The hope is that as Toast's revenue grows and it captures more market share, the bottom line will get in the black.

Toast trades at a compelling valuation

The final reason that investors should consider buying Toast has to do with its valuation. Shares currently trade 64% below their peak price. Investors don't seem to be excited, but this is a good opportunity.

As of this writing, the stock sells at a price-to-sales multiple of 3.2 -- significantly below its historical average of 4.8.

Based on the positive attributes laid out above, specifically around the company's economic moat and growth prospects, adding Toast to your portfolio seems like a no-brainer decision.

Should you invest $1,000 in Toast right now?

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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Block and Toast. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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