Toast: Shares Burned by Digital Fee Rollback, Once Again Fairly Priced

Toast TOST shares were thoroughly singed in intraday trading (down 15%) after the firm announced the rollback of its controversial $0.99 fee on digital orders. The move comes after a widespread outcry by the firm’s predominantly small restaurant customer base, with Restaurant Business reporting that the House Committee on Small Businesses was planning to launch its own investigation of the practice. We view the rollback as strategically cogent. While the fee would have added to the firm’s top line and its ability to reinvest in its increasingly comprehensive suite of software solutions, it became clear very early on that restaurants felt blindsided by the move, and competitors were already counter-positioning themselves against the leading cloud point-of-sale, or POS, provider’s decision. Shares trade in a range we’d consider fairly valued after the correction. We also plan to maintain our Standard Capital Allocation Rating for the company and we note that the move marks the firm’s first true strategic misfire since its IPO in September 2021, though one that could likely have been avoided with more careful test marketing.

Toast’s digital order fee was assessed on customer checks in the “tax and fee” line, with the firm initially contending that many online service providers, like third-party delivery aggregators, charge fees comfortably in excess of $0.99, which they figured would blunt the impact. While the move made some qualitative sense—card-not-present transactions are the most expensive to process, and fees on most online ordering platforms healthily exceed the $0.99 figure—both customers and restaurants felt blindsided by the fee change, with partner restaurants scrambling in many cases to offer offsetting coupons and with a handful of operators going so far as to look into alternative POS providers. We don’t expect any enduring long-term impact from the ill-fated foray, with switching costs and Toast’s data intangible assets underpinning a durable moat.