Toast Is Anything But Toast 

Are you familiar with Boston-based Toast (TOST)? 

The company provides a cloud-based restaurant software platform that includes three base products and more than 15 add-ons to help restaurants of every size operate smoothly. Its software is used in approximately 62,000 locations, up from 43,000 a year ago. 

Sounds great, right? It is. The only problem is that it doesn’t make money. A year ago, investors loved talking about the pathway to profitability. Now they just want profitability. To heck with the path. 

As a result, Toast’s stock has lost 55% of its value year-to-date through May 19. 

Toast reported Q1 2022 results last week. They were very good. And even though it didn’t report a profit, investors might want to take a bite out of this tasty morsel while it’s still cheap. 

Here’s why. 

Covid Proved Restaurants Need More Game in the Tech Department

Over the past two years, it’s become crystal clear that successful restaurants need more than good food and ambiance. They need technology, data analysis, and a way to keep all the touchpoints of their business easily accessible. 

That’s Toast’s reason for being. 

“By serving as the restaurant operating system across dine-in, takeout, and delivery channels, Toast helps restaurants streamline operations, increase revenue and deliver amazing guest experiences,” Toast’s corporate overview states. 

Businesses that succeeded during the pandemic could pivot from in-restaurant dining to take out and delivery without missing a beat. 

In the first quarter, Toast added more than 5,000 net new locations. It was the company’s first-quarter to reach this lofty plateau. I expect that it will continue to set records in 2022 and beyond. 

As a result of these added locations, revenue jumped 90% to $535 million in the quarter. Its annualized recurring run rate in Q1 2022 was $637 million, 66% higher than a year earlier. Of equal importance is that 60% of its locations are using four or more of its add-on products. That’s up from 40% in Q1 2020. 

As the company sets records for adding locations while multiplying the products used by its restaurant customers, Its revenues will take off. 

How Good Were Its Earnings?

It beat the analyst estimate for revenues by $47 million. On the bottom line, it lost $23 million, 77% better than its Q1 2021 loss and 81% less than analyst expectations. 

JPMorgan analyst Tien-tsin Huang, who could best be described as neutral on the stock, said positive things about Toast after it reported earnings on May 13.

“TOST’s 1Q ticked the right boxes with results to build investor confidence in this difficult market, including a hearty beat and raise, key KPIs [key performance indicators] showing a broad up-tick in demand, and perhaps most importantly, a greater focus on efficient, disciplined growth,” the analyst wrote in a note to clients. 

Before reporting its Q1 results, the company’s outlook for 2022 called for revenue of $2.35 billion at the midpoint of its guidance. As part of its quarterly report, it raised its revenue outlook in 2022 to $2.53 billion. Its projected loss in 2022 is $185 million at the midpoint of its guidance, 16% lower than its previous estimate.

Of the 17 analysts covering TOST, nine rates it a Buy, one gives it an Overweight rating, six have it as a Hold, and one believes it’s a Sell. The average target price is $22.93, 55% higher than its current price.

Who’s Buying Toast Stock?

San Francisco hedge fund Greenoaks Capital Partners’ Q1 2022 13F listed Toast as its second-largest holding accounting for 10.6% of its $1.6 billion equity portfolio. The next largest has a weighting of 5.8%, not quite half Greenoaks’ position. During the first quarter, the hedge fund added to its position, buying 1.05 million shares and upping its stake by 15%.

HMI Capital Management was another San Francisco hedge fund buying TOST stock during the first quarter. It reported $3.43 billion on its Q1 2022 13F. TOST is HMI’s seventh-largest position and accounts for 8.41% of its total portfolio. The hedge fund added 6.8 million shares in the first quarter, bringing its total to 13.27 million. At today’s share price, they’re worth almost $200 million. 

Even Al Gore’s investment company, Generation Investment Management, owns 6.3 million shares.

On May 16, Toast announced that it had renewed its partnership with US Foods (USFD). Serving more than 250,000 restaurants and foodservice operators across the country, US Foods will continue to recommend Toast’s platform to its customers to save them time and make them more money through a better customer experience. 

Toast was founded after three computer engineers had a particularly long wait for a check at a Boston restaurant. They wondered why someone hadn’t come up with an app that enabled you to pay your bill from your phone. 

The rest, as they say, is history. Adding 5,000 new locations a quarter certainly will help it keep growing. From where I sit, Toast is anything but toast.