Toast Earnings: Solid Unit Growth, Viable Route to Profitability Underpin Positive Market Reaction

After digesting narrow-moat Toast's fourth-quarter results, we intend to increase our $19.20 fair value estimate by a mid-single-digit percentage. The firm posted $1 billion in sales and $29 million in adjusted EBITDA, aligning with our sales estimate and comfortably surpassing our $12 million forecast for adjusted EBITDA. We were impressed by both its 7,000 quarterly restaurant additions and a 12% annual increase in software revenue per unit, besting our 6,000 unit and 7% growth estimates, respectively. Partially offsetting this outperformance was guidance for higher-than-anticipated near-term costs, due to severance payments after a 10% workforce reduction, and slower projected growth in average revenue per user, or ARPU, in fiscal 2024 as smaller restaurants and midmarket chains are onboarded. On the latter, we now project just north of 5% growth in ARPU in 2024, down from roughly 8% previously. We view shares as fairly priced.