Why Pick Toast Stock?

Question: Why would you pay 2x revenues for Block stock (NYSE:XYZ) – when you can buy Toast stock, (NYSE:TOST) a cloud-based restaurant management platform, for 5x? You wouldn’t, especially when you consider three key factors—growth, profitability, and financial position—which suggest that Toast has a stronger financial footing and a more promising future.

• Growth: Toast has a much stronger growth trajectory. Over the last three years, its average revenue growth was an impressive 39%, far outpacing Block’s 13%.
• Profitability:  Though not great, Toast is more efficient at turning revenue into cash. Its operating cash flow margin is 9%, significantly higher than Block’s 5.6%.
• Financial Position: Toast has a much healthier balance sheet. Its debt-to-equity ratio is just 0.1% compared to Block’s 12.6%, and cash makes up 58% of its assets, while it only accounts for 35% of Block’s.

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Is Toast A Safe Bet?

While Toast might not be a traditional “safe haven” investment, it’s important to consider its historical performance during market shocks. For example, Toast’s stock experienced significant declines of 80% during the 2022 inflation shock and the stock is yet to recover to its pre-crisis highs. This illustrates that it’s not immune to market volatility.

That said, AI’s potential for long-term growth makes Toast an attractive investment, especially given its recent success. The company achieved $1.9 billion in Annual Recurring Revenue (ARR) and saw its recurring gross profit grow by 35% year-over-year in the latest quarter.

AI-Powered Solutions and Market Position

While many companies offer point-of-sale solutions, Toast stands out with its AI-powered innovations like ToastIQ and Toast Now AI. These tools use Toast’s unique restaurant data to provide valuable insights for its customers. This integration of advanced AI and a comprehensive restaurant management platform positions Toast as a leader in the restaurant technology AI market.

Future Growth and Revenue

Toast’s strong market position is bolstered by its massive customer base. The company could expand to 200,000 locations by 2026, compared to 148,000 currently. The full launch of ‘Toast Now AI’ is also expected to increase average revenue per user (ARPU) by 5-7%, further driving growth in the expanding foodservice technology sector. The company’s top line is expected to grow at a 20% average annual rate over the next few years. Also, see – The Trade Desk: Buy TTD Stock Now At $65?

What Could Go Wrong?

Several key risks could challenge Toast’s growth and investment appeal. The company operates in a volatile industry and faces significant threats from intense competition and economic instability.

Competitive and Economic Pressures

Toast faces fierce competition from established point-of-sale (POS) companies and new entrants like DoorDash, which is expanding into the POS market. This could jeopardize Toast’s partnerships and customer base. The company’s reliance on the restaurant industry also makes it highly vulnerable to economic downturns. During an economic slowdown, for example, restaurant revenue would usually drop, which would directly impact technology spending and, in turn, Toast’s revenue.

Operational and Industry Challenges

Operational risks include the potential for security breaches and declining profit margins as competition increases. The company also faces challenges with its international expansion, where local competitors are already well-established.

The restaurant industry’s high turnover rate and frequent closures mean Toast must constantly acquire new customers just to maintain its growth. Additionally, macroeconomic factors like inflation could reduce both consumer spending and business investment in new technology, further pressuring the company.

Overall, even though TOST stock is currently more expensive than XYZ stock, it appears to be the more attractive investment. However, investors should carefully consider the risks involved before making a decision. See, there always remains a meaningful risk when investing in a single, or just a handful, of stocks. Consider Trefis High Quality (HQ) Portfolio which, with a collection of 30 stocks, has a track record of comfortably outperforming the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

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