This under-the-radar name offers a huge opportunity for growth investors willing to see it.
Like bargains? Most investors do. And growth-minded investors looking for a discounted new pick to add to their portfolios now might want to consider Toast (TOST -1.59%). The stock is trading down 62% from its all-time high, but it is also seemingly testing the possibility of a rebound.
What the heck is Toast?
It may not be a household name, but there's a good chance that you've benefited from its technology. Toast supplies restaurants with point-of-sale systems built from the ground up to meet the unique needs of operators in that industry. From customer checks to supply management to online ordering to marketing, Toast can help the managers of any eatery better handle its operation.
Toast is not the only name in its business. More familiar fintech giants like PayPal and Block also offer point-of-sale systems designed for restaurants. Their alternatives aren't quite as complete as Toast's, however. For instance, Toast's software can tell you how much it costs to prepare a particular meal based on the per-plate cost of its ingredients. It also allows restaurateurs to manage their own online menus and delivery networks, negating the need for them to use third-party food delivery services like DoorDash or GrubHub.
Image source: Getty Images.
It's not just a superior suite of restaurant-tech solutions, though. The business model is one that current and prospective investors can get excited about.
While Toast sells equipment, it also offers ongoing services, which results in a stream of recurring, predictable revenue. Roughly $300 million of last quarter's top line of nearly $1.1 billion came from recurring revenue subscriptions. Toast also gets a small portion of every bill paid by its restaurant clients' customers. Although Toast's cut of these payments is less than 1% of each check, given that the company processed $34.7 billion worth of food checks last quarter alone, this isn't an insignificant amount.
Perhaps most importantly though, this arrangement means its clients can trust that Toast has every incentive to help them grow their business. That means growth for Toast too, after all.
Toast's competitive edge is paying off
Point-of-sale systems customized for the needs of restaurants aren't exactly a new idea. Outfits like PayPal and Block have been in the business for a while now, but their offerings only replaced platforms that were no longer state of the art. Toast launched in 2012, and by the time it commercialized its technology in 2013, there was already (or soon would be) plenty of comparable competition.
It's the little things its systems provide, however, that are making a big difference in its profitability and potential growth.
While managing restaurants has always been challenging, it has arguably never been more challenging than it is right now. For instance, in their efforts to save on costs, many restaurants are dealing with more suppliers than they ever have before. Employee expectations on compensation are higher as well, with minimum wage in some states now standing at $20 per hour. Customers are more demanding than ever, too, because they can be; with the mobile internet, it's easier than ever to find an alternative restaurant or leave a scathing online review. Every detail and every penny matters in such an environment.
There's still tremendous opportunity for a solutions provider that can help restaurateurs handle those details, though. Research outfit Spherical Insights believes the worldwide restaurant point-of-sale market will grow at an annualized pace of nearly 10% through 2032. Given that Toast is a top-tier solutions provider, the analyst community expects its growth to outpace that of the overall industry.
Data source: StockAnalysis.com. Chart by author.
This growth is expected to push the company out of the red and into the black in 2025. Although there's not enough visibility beyond 2026 to let analysts make a clear prediction regarding profits past that point, they all agree that strong top-line growth awaits for at least the next several years.
Timing isn't everything, but it's certainly something
If the opportunity is so great, then why are Toast shares still down so much from their late 2021 peak?
Consider the circ*mstances at the time. The stock market was going nuts despite the COVID-19 pandemic. Lots of companies were raising money in that bullish environment by issuing new stock or going public. Toast was no exception. Indeed, the restaurant business was particularly in high demand at the time, as consumers had fewer ways to splurge. It was an easy story to sell to investors.
That euphoria buckled, of course. The bear market began in 2022, inflation climbed, and although social distancing measures were starting to be relaxed, companies and consumers remained cautious. That environment took the wind out of Toast's shares' sails.
Today, however, the stock -- while still well down from its peak -- is testing new multiyear highs. That's a sign that investors are at least starting to see the scope of the opportunity here. The analyst community isn't quite on board yet. The consensus price target stands at $27.62, which is just slightly above the stock's price.
Don't read too much into that, though. This may be one of those cases where analysts need to see a stock start performing better before they adjust their targets. You don't necessarily need to wait for their tacit approval. Analysts can be wrong, and they can certainly move too slowly. If you're a risk-tolerant investor who believes in Toast's story, the reward potential right here and right now is worth the risk.
James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Block, DoorDash, PayPal, and Toast. The Motley Fool recommends the following options: short June 2024 $67.50 calls on PayPal. The Motley Fool has a disclosure policy.
