Toast Earnings: Strong Profit Improvement Lifts 2025 Expectations; Shares Rich

Narrow-moat Toast posted strong first-quarter results, with $1.3 billion in revenue in line with our estimate and $134 million in adjusted EBITDA exceeding our $104 million forecast. The profit upside was fueled by disciplined execution in the firm’s financial technology arm, where cost control helped shave 143 basis points off cost of goods sold (ahead of our expectation for 70 basis points of deleverage) and pricing initiatives pushed the net take rate to 0.59%, a 5-basis-point improvement. Buoyed by the strong start to the year, management lifted its 2025 outlook, guiding to 26% growth at the midpoint (up from 24%) for non-GAAP subscription services and fintech gross profit and raising the midpoint of its adjusted EBITDA target to $550 million from $520 million. Given the strong performance, we plan to raise our 25% and $504 million respective estimates closer to management’s revised outlook for the year. As a result, we plan to bump up our $26.50 fair value estimate by a mid-single-digit percentage. Although we have a positive view of Toast’s strategy and long-term growth trajectory, we see the shares as overvalued and urge caution at current levels, as they trade around a 35% premium to our intrinsic valuation.