If You're Considering Investing in Toast Stock Currently, Here are Three Essential Facts
If You're Considering Investing in Toast Stock Currently, Here are Three Essential Facts
Shares of Toast (TOST 2.22%) have had an astonishing year. As of now, they've shot up an incredible 110% just in 2024 (as of Dec. 11). This growth outperforms the Nasdaq Composite index.
However, this high-growth stock is currently trading 41% below its peak, which might be an attractive proposition for investors wanting to purchase at a lower price. Before doing so, consider these three points about Toast.
1. Market focus
Toast is a hardware and software company that caters to the specific needs of the restaurant industry. They provide point-of-sale devices to facilitate payment methods and also offer marketing tools, employee management, omnichannel capabilities, loyalty programs, and loans. Investors can view the company as the restaurant industry's operational system.
One potential setback of serving the restaurant industry is its sensitivity to macroeconomic factors. If there are economic downturn fears and consumer confidence decreases, restaurant spending is often one of the first things to be reduced. Add this to the industry's high failure rate, and it's not the most promising environment for a company like Toast.
In the three-month period ending Sept. 30, the company generated $1.3 billion in revenue, with 14% coming from subscription services. Investors are hoping to see this figure rise, as subscription services provide high-margin sales.
2. Customer stickiness
To be a successful long-term investor, identifying companies with an economic advantage is crucial. These high-quality businesses have traits that allow them to protect their market positions against existing competition and new entrants.
With this in mind, it seems clear that Toast is creating its own economic advantage. Software companies, especially those essential to daily business operations, often benefit from switching costs. Imagine if you had to switch your credit cards, bank accounts, and brokerage to another financial institution. The hassle that would entail is evident.
Toast is likely benefiting from these switching costs. The company does not publicly disclose churn rates, but the expanding customer base is a positive sign. Furthermore, some customers are using more and more services over time, as their needs evolve, indicating Toast's increasing entrenchment in the industry.
Consider the position of a restaurant owner or manager. Once a particular location's employees are trained on Toast's products and services, and these tools are fully integrated and functioning smoothly, changing this setup can cause operational disruptions. As long as Toast maintains a great user experience, it can keep existing customers satisfied and attract new ones.
Toast is also building brand recognition. Management states that 75% of their customers come from inbound marketing channels, and a significant 20% come from referrals.
3. Growth prospects
As a relatively young enterprise, Toast has exhibited impressive growth. Revenue in the third quarter was 168% higher than three years ago. Analysts forecast the top line to grow 89% between 2023 and 2026, still a robust pace.
Central to the company's strategy is acquiring customers at a rapid rate. Toast currently serves 127,000 different restaurant locations, adding 7,000 in the last quarter. However, management envisions vast opportunities both in the U.S. and internationally.
Domestically, there are approximately 875,000 restaurants. And internationally, this number skyrockets to about 14 million (excluding China). Restaurants are expected to spend $55 billion in the U.S. on technology alone this year. This environment suggests that Toast still has plenty of room to grow.
If you're contemplating purchasing the stock, now you're better informed about Toast's customer value proposition, switching costs, and growth prospects.
In light of Toast's impressive growth and potential for further expansion, investors might consider reinvesting some of their finance into the company for future gains. The high churn rate among software companies is often a concern, but Toast's expanding customer base and increasing entrenchment in the industry suggest that they are successfully overcoming this challenge.
For those considering investing in Toast, it's crucial to consider the potential impact of macroeconomic factors on the restaurant industry. If there are economic downturn fears and consumer confidence decreases, restaurant spending may be one of the first things to be reduced, which could have an impact on Toast's revenue. However, Toast's diversified offerings and strong customer base could help mitigate these risks.