Company Reports

We are discontinuing analyst coverage of Toast.

Toast positions itself as the premier restaurant operating system, providing a comprehensive cloud-based platform to address the diverse requirements of the restaurant community. The company has benefited from its radical focus on addressing independent medium-size restaurants allowing it to out-innovate competitors and create deep integrations with clients. As a result, Toast has quickly expanded beyond a basic point-of-sale solution to create a vertically integrated platform across software, payments, and hardware.

Toast reported third-quarter results with revenue up 25% year over year and adjusted EBITDA margins improving over 200 basis points compared with the same period a year ago. This performance gave management the confidence to raise their full-year outlook across both metrics.

Toast positions itself as the premier restaurant operating system, providing a comprehensive cloud-based platform to address the diverse requirements of the restaurant community. The company has benefited from its radical focus on addressing independent medium-size restaurants allowing it to out-innovate competitors and create deep integrations with clients. As a result, Toast has quickly expanded beyond a basic point-of-sale solution to create a vertically integrated platform across software, payments, and hardware.

Toast reported strong second-quarter results characterized by revenue and adjusted EBITDA growth of 25% and 75% year over year, respectively. Revenue and adjusted EBITDA exceeded FactSet consensus expectations, as the company continues to execute on all fronts.

We are transferring coverage of the cloud-based restaurant technology platform Toast. The firm differentiates based on target market and capability. Toast offers a vertically integrated platform across software, payments, and hardware to small- and medium-sized restaurants.

Toast positions itself as the premier restaurant operating system, providing a comprehensive cloud-based platform to address the diverse requirements of the restaurant community. The company has benefited from its radical focus on addressing independent medium-size restaurants allowing it to out-innovate competitors and create deep integrations with clients. As a result, Toast has quickly expanded beyond a basic point-of-sale solution to create a vertically integrated platform across software, payments, and hardware.

We take a generally positive view of Toast's strategy, which seeks to capitalize on two major tailwinds in the restaurant industry: the adoption of cloud-deployed point-of-sale systems and the uptake of technology-enabled solutions, with operators looking to improve operating efficiency as industry margins are tighter than ever. As the leader in a growing market, Toast's heavy investments in onboarding new units, building out platform functionality, developing an ecosystem of partner application programming interfaces, and filling holes in the platform through targeted roll-up acquisitions strike us as appropriate.

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.

We take a generally positive view of Toast's strategy, which seeks to capitalize on two major tailwinds in the restaurant industry: the adoption of cloud-deployed point-of-sale systems and the uptake of technology-enabled solutions, with operators looking to improve operating efficiency as industry margins are tighter than ever. As the market leader in a growing vertical, Toast's heavy investments in onboarding new units, building out platform functionality, developing an ecosystem of partner application programming interfaces, and filling holes in the platform through targeted roll-up acquisitions strike us as appropriate.

Narrow-moat Toast posted a solid fourth quarter, delivering $1.34 billion in sales and $111 million in adjusted EBITDA, in line with our $1.35 billion revenue estimate and topping our $92 million EBITDA forecast. Despite decent quarterly performance, the firm’s pivot toward higher investment and new growth verticals in 2025 leads us to moderate our near-term expectations. Management’s guidance reflects this, with a forecast for 24% growth in non-GAAP subscription services and financial technology gross profit and $520 million in adjusted EBITDA at the midpoints, falling well below our prior expectations for 32% growth and $596 million, respectively. After digesting the results, we plan to revise our estimates to incorporate an uptick in near-term investment and incrementally slower new store additions than we had initially contemplated, resulting in a low-single-digit anticipated haircut to our $27 per share fair value estimate.

We take a generally positive view of Toast's strategy, which seeks to capitalize on two major tailwinds in the restaurant industry: the adoption of cloud-deployed point-of-sale systems and the uptake of technology-enabled solutions, with operators looking to improve operating efficiency as industry margins are tighter than ever. As the market leader in a growing vertical, Toast's heavy investments in onboarding new units, building out platform functionality, developing an ecosystem of partner application programming interfaces, or APIs, and filling holes in the platform through targeted roll-up acquisitions strike us as appropriate.

Narrow-moat Toast delivered strong third-quarter results, with revenue reaching $1.31 billion, edging our $1.29 billion forecast, while adjusted EBITDA of $113 million comfortably surpassed our $80 million estimate. The 28% year-over-year revenue growth was fueled by the sequential addition of 7,000 restaurants, exceeding our forecast for 6,500. Also propelling the outperformance was software revenue per unit surging 12.1% annually, materially above our anticipated 5.3% growth. The difference was largely driven by enhancements to the billing infrastructure that facilitated higher revenue conversion—we expect much of that increase to be nonrecurring.

We take a positive view of Toast's strategy, which seeks to capitalize on two major tailwinds in the restaurant industry: the adoption of cloud-deployed point-of-sale systems and the uptake of technology-enabled solutions, with operators looking to improve operating efficiency as industry margins remain tighter than ever. One epiphenomenon of pandemic-induced lockdown restrictions, in our view, is a structural increase in consumer acceptance of digital channels, with restaurants increasingly needing to offer some combination of delivery integration, digital ordering, and rewards programs to meet the evolving needs of today's restaurant consumer. As the market leader in a growing vertical, heavy investments in onboarding new units, building out platform functionality, developing an ecosystem of partner application programming interfaces, or APIs, and filling holes in the platform through targeted roll-up acquisitions strike us as appropriate.

Narrow-moat Toast's second quarter was solid, with the firm's $1.24 billion in revenue matching our projection, while $92 million in adjusted EBITDA comfortably edged our $74 million forecast as the firm posted GAAP profitability for the first time. Strong 27% revenue growth was driven by a robust 8,000 restaurant additions and modest increases in software sales per unit (up 5.3%), an attestation to the allure of the firm's attractive product suite despite a very challenging industry environment. As we digest quarterly results, we envision limited changes to our $23.50 fair value estimate, with strong growth prospects and an expected near-term uptick in investment largely offsetting—with the latter likely responsible for a mid-single-digit-percentage selloff in aftermarket trading. We view the market reaction as myopic, given the strong incremental returns on capital that Toast continues to enjoy, leaving shares trading in a range we'd consider fairly valued.

Narrow-moat Toast's investor day shed light on its growth priorities but largely served to reaffirm our projections for the restaurant technology firm, with minimal impact to our outlook. Management's target for 30%-35% adjusted EBITDA as a percentage of recurring gross profit in 2026 and 2027 roughly aligns with our estimates of 33% and 38%, respectively, while the longer-term expectation of a 40% or higher margin is consistent with our projections thereafter. Elsewhere, our forecast for 24% growth in recurring gross profit over the next five years meshes well with the company's target of 20% or more annual growth. As such, we don't plan to alter our $23.50 fair value estimate. Following a 7% drop in May 29 trading, we see shares are fairly valued and attribute the decline to unduly lofty investor expectations. We remain optimistic about the restaurant technology leader's prospects, maintaining particular excitement about the firm's efforts to leverage its extensive database of payment and software touchpoints to enhance efficiency for restaurateurs amid a challenging industry environment.

We take a positive view of Toast's strategy, which seeks to capitalize on two major tailwinds in the restaurant industry: the adoption of cloud-deployed point-of-sale systems and the uptake of technology-enabled solutions, with operators looking to improve operating efficiency as industry margins remain tighter than ever. One epiphenomenon of pandemic-induced lockdown restrictions, in our view, is a structural increase in consumer acceptance of digital channels, with restaurants increasingly needing to offer some combination of delivery integration, digital ordering, and rewards programs to meet the evolving needs of today's restaurant consumer. As the market leader in a growing vertical, heavy investments in onboarding new units, building out platform functionality, developing an ecosystem of partner application programming interfaces, or APIs, and filling holes in the platform through targeted roll-up acquisitions strike us as appropriate.

We plan to raise our $19.50 fair value estimate for narrow-moat Toast by a high-teens percentage after the company's first-quarter report, leaving the shares trading in a range we consider fairly valued. While revenue of $1.08 billion was in line with our $1.05 billion projection, the fruits of restructuring far exceeded our expectations. Toast achieved 980 basis points of operating margin improvement to negative 1.4% versus our negative 6% forecast. More importantly, commentary on the call suggested further operating leverage, and with the firm raising its full-year adjusted EBITDA guidance by $50 million at the midpoint, to $250 million-$270 million, we see a clear path to GAAP profitability in 2025 and higher-than-expected equilibrium operating margins.

We take a positive view of Toast's strategy, which seeks to capitalize on two major tailwinds in the restaurant industry: the adoption of cloud-deployed point-of-sale systems and the uptake of technology-enabled solutions, with operators looking to improve operating efficiency as industry margins remain tighter than ever. One epiphenomenon of pandemic-induced lockdown restrictions, in our view, is a structural increase in consumer acceptance of digital channels, with restaurants increasingly needing to offer some combination of delivery integration, digital ordering, and rewards programs to meet the evolving needs of today's restaurant consumer. As the market leader in a growing vertical, heavy investments in onboarding new units, building out platform functionality, developing an ecosystem of partner application programming interfaces, or APIs, and filling holes in the platform through targeted roll-up acquisitions strike us as appropriate.

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.