In today's report, we will delve into a hyper-growth company, Toast Inc. What draws our attention to Toast? Its all-in-one platform powering the restaurant industry has witnessed remarkable growth, underscoring its strong product-market fit. Achieving a market share of approximately 10% in the US within a short span of time, coupled with its substantial addressable market estimated at approximately $110 billion globally, makes Toast hard to ignore. Furthermore, we are intrigued by the potential of software companies like Toast to generate high returns on capital, buoyed by elements of high switching costs. Through our analysis, we aim to provide a comprehensive overview of the company and its competitive landscape, concluding with a DCF calculation.
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1. Key Facts
Description: Toast, Inc. (“Toast”, “Company”), with ticker symbol $TOST, is a cloud-based software offering all in one solutions for restaurants in the United States. The Company offers a comprehensive suite of services encompassing POS (point of sale), payment processing, hardware technology, and other software as a service (SaaS) solutions. Serving as the backbone of restaurant operations, Toast's platform seamlessly integrates front-of-house and back-of-house functions, catering to dine-in, takeout, and delivery channels.
Key Financials: Over the period FY19 to FY23, the Company depicted a revenue Compound Annual Growth Rate (“CAGR”) of 55%, achieving revenues of approximately $3.9 billion, while reporting gross profit of $839 million (90% CAGR) and operating loss of $287 million for FY23. Toast has cash and short term investments of $1.1 billion and no outstanding debt.
Price & Market Cap (as of 20th March 2024): Its market cap is $13 billion with a 52-week low of $13.8 and a 52-week high of $27, whereas it currently trades at $23.7.
Valuation: Toast trades at a TTM EV/Sales of 3x (3 Year average of 4.5x) and a TTM EV/Gross Profit of 13.9x (3 Year average of 23.6x).
2. Business Overview
“At our heart, our mission is to empower the restaurant community to delight their guests, do what they love and thrive.” Christopher Comparato, former CEO
In 2012, Aman Narang, along with Steve Fredette and Jonathan Grimm, co-founded Toast, with the vision of creating a purpose-built platform specifically tailored for the unique needs of the restaurant industry. Setting themselves apart from competitors which offer POS and payment solutions for various industries, Toast aimed to revolutionize restaurant operations. The Company made headlines in 2021 with one of the most significant IPOs, pricing its initial public offering at $20 billion, or $40 per share. Toast made its highly anticipated debut on the New York Stock Exchange in September 2021, with its stock closing at $62.51, marking a 56% increase from its IPO price. Since IPO, investors have been on a rollercoaster ride even though the underline business continued to grow towards profitability at a fast pace.
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Originally starting with just the POS system offering, Toast has evolved to incorporate payment solutions. Today, it boasts five lines of business, each offering distinct solutions—a testament to its prowess in product innovation. Once a customer is onboarded, the Company can further leverage its relationship by upselling additional adjacent solutions, such as payroll processing, third-party delivery integrations, digital ordering and delivery capabilities, and reservations management.
Source: Toast Q4’23 Presentation
The majority of Toast's customers are small and medium-sized businesses (SMBs), typically operating one to ten restaurant locations. Despite its primary focus on SMBs, Toast has strategically expanded its Total Addressable Market (TAM) by developing tailored solutions, such as Toast for Hotel Restaurants, to cater to mid-market and enterprise segments. Recent successes include customer wins of renowned brands like Marriott, Caribou Coffee, and Choice Hotels.
In terms of revenue generation, the Company’s revenue primarily stems from subscriptions to its Software-as-a-Service (SaaS) offerings, with the core offering being its POS system. Additionally, Toast earns fees from processing payments and revenue from the sale of hardware, which powers the Company’s tech stack.
Toast's growth strategy is built upon the following key pillars:
Increasing restaurant locations
Growing Annualized Recurring Run-Rate (ARR) and revenue per location
Expanding the addressable market by launching and scaling new growth vectors