2 Reasons to Like TOST and 1 to Stay Skeptical

Over the past six months, Toast’s shares (currently trading at $30.10) have posted a disappointing 10.8% loss, well below the S&P 500’s 8.2% gain. This may have investors wondering how to approach the situation.

Following the drawdown, is now an opportune time to buy TOST? Find out in our full research report, it’s free.

Why Does TOST Stock Spark Debate?

Born from the frustrations of three friends waiting too long for their restaurant bill, Toast (NYSE:TOST) provides a cloud-based digital technology platform with software, payment processing, and hardware solutions built specifically for restaurants.

Two Positive Attributes:

1. ARR Surges as Recurring Revenue Flows In

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

Toast’s ARR punched in at $2.15 billion in Q1, and over the last four quarters, its year-on-year growth averaged 28%. This performance was fantastic and shows that customers are willing to take multi-year bets on the company’s technology. Its growth also makes Toast a more predictable business, a tailwind for its valuation as investors typically prefer businesses with recurring revenue.

2. Projected Revenue Growth Is Remarkable

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite, though some deceleration is natural as businesses become larger.

Over the next 12 months, sell-side analysts expect Toast’s revenue to rise by 19.8%. While this projection is below its 25.1% annualized growth rate for the past two years, it is admirable and suggests the market is baking in success for its products and services.

One Reason to Be Careful:

Long Payback Periods Delay Returns

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Toast’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a competitive market and must continue investing to grow.

Final Judgment

Toast’s merits more than compensate for its flaws. With the recent decline, the stock trades at 2.3× forward price-to-sales (or $30.10 per share). Is now a good time to initiate a position? See for yourself in our full research report, it’s free.

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