Toast Earnings: Shares Fall on Lofty Expectations and Slowing Restaurant Sales and Are Now Cheap

We see value in narrow-moat Toast’s TOST shares after an 18% decline in Nov. 7 aftermarket trading, although we plan to lower our $21 fair value estimate by a high-single-digit percentage after digesting results. We harbor concerns about the firm’s medium-term sales prospects after net unit adds of 6,500 came in lighter than our 6,900 forecast, and we expect to trim our long-term software average revenue per unit estimates as Toast expands into smaller market segments. Commentary about “gradual” growth in ARPU going forward gave investors heartburn, and while we don’t believe that the firm is approaching the end of its high-growth phase, we do believe it is likely to see more pronounced diminishing marginal returns on new unit additions than originally anticipated. Our revised forecasts see Toast achieving closer to $10,000 in software ARPU in 2032 (down from $13,500), partially offset by an uptick in total units (to 315,000 in 2032 from 290,000) as it increases its footprint among smaller restaurant, enterprise, and international restaurants.

Third-quarter results were solid, with $1.03 billion in revenue matching our estimate and $35 million in adjusted EBITDA topping our $15 million forecast. The firm increased annual recurring revenue by 40%, driven by 7.7% ARPU growth (ahead of our 6% forecast) and 6,500 net restaurant adds (33% growth). Toast continues to balance dynamic growth and profitability and retains an attractive investment case as it now services nearly 100,000 restaurants in the United States and continues to profit from a generational mix shift toward cloud-deployed point-of-sale systems. Near-term prospects do look bleaker than we’d expected, however. We expect a substantial haircut to our 12.5% ARPU growth estimate in 2024 to account for shifting mix (smaller onboards) and a more challenging pricing environment, with the road to achieving $10,000 in ARPU now looking longer than we’d initially expected.