Toast Raises Revenue Expectations, But Operating Losses Remain High

Oct. 06, 2022 4:02 PM ETToast, Inc. (TOST)1 Comment

Summary

  • Toast went public in September 2021, raising $870 million in a U.S. IPO.
  • The firm provides restaurant management and transaction processing software in North America.
  • TOST has produced strong revenue growth but also high operating losses, which have been punished in the current market environment where the cost of capital has risen.
  • Until management can make a substantial turn toward operating breakeven or the cost of capital starts dropping, I'm on Hold for TOST.
  • Looking for more investing ideas like this one? Get them exclusively at IPO Edge. Learn More »

customer contactless payment for drink with mobile phon at cafe counter bar,seller coffee shop accept payment by mobile.new normal lifestyle concept

Weedezign

A Quick Take On Toast

Toast (NYSE:TOST) went public in September 2021, raising approximately $870 million in gross proceeds from an IPO that priced at $40.00 per share.

The firm provides a cloud-based restaurant software platform for dine-in, takeout and delivery channel management.

TOST has been punished by the market for its high and increasing operating losses in a rising cost of capital environment, so until management makes a meaningful turn toward operating breakeven or the cost of capital starts dropping, I’m on Hold for the stock.

Toast Overview

Boston, Massachusetts-based Toast was founded to develop a SaaS platform to process payments for restaurants via a mobile app, hardware system and third-party providers.

Management is headed by Chief Executive Officer Christopher P. Comparato, who has been with the firm since February 2015 and was previously head of Customer Success at Acquia and Endeca Technologies.

The company’s primary offerings include:

  • Point of sale

  • Restaurant operations

  • Digital ordering & delivery

  • Marketing & loyalty

  • Team management

The firm pursues relationships with medium and large restaurant operators through its direct sales force.

The company has four primary revenue streams:

  • Subscription services

  • Financial technology solutions

  • Hardware

  • Professional services

Toast’s Market & Competition

According to a 2018 market research report by Grand View Research, the global restaurant management software market is forecast to reach nearly $7 billion by 2025.

This represents a forecast CAGR of 14.6% from 2019 to 2025.

The main drivers for this expected growth are a growing awareness by restaurant operators of the benefits of increased efficiencies from software systems.

Also, the COVID-19 pandemic will bring forward significant demand for integrated restaurant management systems in order to streamline processes while providing restaurant services in a more omnichannel approach to customers.

Major competitive or other industry participants include:

  • Square

  • Touchbistro

  • Clover Network

  • Lightspeed POS

  • Oracle/Micros

  • NCR

  • PAR Technology

  • Heartland Payment Systems

  • Shift4 Payments

  • Fiserv

  • FreedomPay

  • Olo

  • Others

Toast’s Recent Financial Performance

  • Total revenue by quarter has risen substantially, as the chart shows below:

9 Quarter Total Revenue

9 Quarter Total Revenue (Seeking Alpha)

  • Gross profit by quarter has also grown materially:

9 Quarter Gross Profit

9 Quarter Gross Profit (Seeking Alpha)

  • Selling, G&A expenses as a percentage of total revenue by quarter have produced the following results:

9 Quarter Selling, G&A % Of Revenue

9 Quarter Selling, G&A % Of Revenue (Seeking Alpha)

  • Operating losses by quarter have worsened sharply in the three most recent quarters:

9 Quarter Operating Income

9 Quarter Operating Income (Seeking Alpha)

  • Earnings per share (Diluted) have generally remained negative, as shown below:

9 Quarter Earnings Per Share

9 Quarter Earnings Per Share (Seeking Alpha)

(All data in above charts is GAAP)

In the past 12 months, TOST’s stock price has fallen 65% vs. the U.S. S&P 500 index’ drop of around 13.6%, as the chart below indicates:

52 Week Stock Price

52 Week Stock Price (Seeking Alpha)

Valuation And Other Metrics For Toast

Below is a table of relevant capitalization and valuation figures for the company:

Measure [TTM]

Amount

Enterprise Value / Sales

3.62

Revenue Growth Rate

86.2%

Net Income Margin

-15.0%

GAAP EBITDA %

-16.0%

Market Capitalization

$9,080,000,000

Enterprise Value

$7,990,000,000

Operating Cash Flow

-$117,000,000

Earnings Per Share (Fully Diluted)

-$1.36

(Source - Seeking Alpha)

As a reference, a relevant partial public comparable would be Lightspeed POS (LSPD); shown below is a comparison of their primary valuation metrics:

Metric

Lightspeed POS

Toast

Variance

Enterprise Value / Sales

3.56

3.62

1.7%

Revenue Growth Rate

101.2%

86.2%

-14.8%

Net Income Margin

-56.1%

-15.0%

-73.3%

Operating Cash Flow

-$106,020,000

-$117,000,000

10.4%

(Source - Seeking Alpha)

A full comparison of the two companies’ performance metrics may be viewed here.

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

TOST’s most recent GAAP Rule of 40 calculation was 70.2% as of Q2 2022, so the firm has performed quite well in this regard, per the table below:

Rule of 40 - GAAP

Calculation

Recent Rev. Growth %

86.2%

GAAP EBITDA %

-16.0%

Total

70.2%

(Source - Seeking Alpha)

Commentary On Toast

In its last earnings call (Source - Seeking Alpha), covering Q2 2022’s results, management highlighted the recent acquisition announcement of Sling, which the firm intends to use to ‘expand our team management suite and help restaurants deepen their relationship with employees.’

However, Toast’s customers are facing higher food and labor costs and macroeconomic growth challenges.

Management said that ‘driving towards profitability is a key priority,’ but recent results haven’t shown any real progress in that regard.

As to its financial results, total revenue rose 58% year-over-year as the company surpassed 6,000 net new restaurant locations, although Q2 is seasonally the firm’s strongest for net location additions.

Management did not disclose the company’s net dollar retention rate, which provides investors with visibility into its product/market fit and sales & marketing efficiency.

The firm’s Rule of 40 results have been impressive as a result of its strong topline revenue growth.

While sales and marketing expenses declined as a percentage of recurring revenue, the firm spent more in R&D and G&A and GAAP operating losses widened as it continued to hand out high stock-based compensation of $57 million during the quarter.

For the balance sheet, the firm finished the quarter with $1.179 billion in cash, equivalents, and short term investments.

Over the trailing twelve months, free cash used was $128 million, the highest amount since 2020.

Looking ahead, management raised its full year revenue guidance by 5%, indicating 55% growth expectations.

Regarding valuation, the market is valuing TOST at an EV/Sales multiple of around 3.6x.

The SaaS Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 6.9x at September 30, 2022, as the chart shows here:

SaaS Capital Index

SaaS Capital Index (SaaS Capital)

So, by comparison, TOST is currently valued by the market at a significant discount to the broader SaaS Capital Index, at least as of September 30, 2022.

The primary risk to the company’s outlook is an increasingly likely macroeconomic slowdown or recession, which may slow sales cycles, restaurant activity and reduce its revenue growth trajectory.

A potential upside catalyst to the stock could include a ‘short and shallow’ U.S. slowdown and a pause in interest rate hikes by the U.S. Federal Reserve.

TOST has been punished by the market for its high and increasing operating losses in a rising cost of capital environment, so until management makes a meaningful turn toward operating breakeven or the cost of capital starts dropping, I’m on Hold for the stock.

Gain Insight and actionable information on U.S. IPOs with IPO Edge research.

Members of IPO Edge get the latest IPO research, news, and industry analysis.

Get started with a free trial!

This article was written by

Donovan Jones profile picture
18.66K Followers
Author of IPO Edge
Get IPO Edge with actionable research on next-generation high growth stocks

I'm the founder of IPO Edge on Seeking Alpha, a research service for investors interested in IPOs on US markets. Subscribers receive access to my proprietary research, valuation, data, commentary, opinions, and chat on U.S. IPOs. Join now to get an insider's 'edge' on new issues coming to market, both before and after the IPO. Start with a 14-day Free Trial.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This report is for educational purposes only and is not financial, legal or investment advice. The information referenced or contained herein may change, be in error, become outdated and irrelevant, or removed at any time without notice. You should perform your own research for your particular financial situation before making any decisions.

Recommended For You

Comments (1)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.