Toast Inc. (TOST), a cloud-based, all-in-one digital platform built for restaurants, reported mixed second-quarter 2024 results, with earnings falling short of analysts’ expectations despite better-than-expected revenue. The company posted revenue of $1.24 billion, surpassing analysts’ estimate of $1.22.

Moreover, Toast added nearly 8,000 net new locations during the quarter. As of June 30, 2024, its annualized recurring run-rate (ARR) rose 29% year-over-year to $1.5 billion. However, the company’s second-quarter non-GAAP EPS was $0.04, missing the consensus estimate of $0.10.

Despite solid revenue growth, TOST has faced challenges in achieving consistent profitability. The company has invested heavily in expanding its product offerings and customer base, leading to concerns about its ability to generate sustained profits in the long term.

Also, the restaurant technology space is highly competitive, with several players, including Square, Clover, TouchBistro, and Lightspeed, offering similar point-of-sale (POS) and digital management solutions.

For the third quarter ending September 30, 2024, Toast expects its non-GAAP subscription services and financial technology solutions gross profit in the range of $345 million to $355 million (23-27% growth versus Q3 2023). The company’s adjusted EBITDA is expected to be in the range of $70 million to $80 million

For the full year ending December 31, 2024, TOST expects non-GAAP subscription services and financial technology solutions gross profit in the range of $1,340 million to $1,360 million (27-29% increase compared to 2023). Its adjusted EBITDA is anticipated to be in the range of $285 million to $305 million (up from $250 million to $270 million)

TOST’s stock has surged 7.2% over the past six months to close the last trading session at $24.63. However, the stock has declined 6.6% over the past month.

Let’s look at factors that could influence TOST’s performance in the upcoming months.

Solid Financials

During the second quarter that ended June 30, 2024, TOST’s total revenue increased 27% year-over-year to $1.24 billion. Its gross profit rose 37.5% from the year-ago value to $286 million. The company’s adjusted EBITDA was $92 million, an increase of 513.3% year-over-year.

Furthermore, the company’s net income came in at $14 million and $0.02 per share, compared to a net loss of $98 million and $0.19 per share in the prior year’s quarter, respectively. Its free cash flow rose 176.9% year-over-year to $108 million.

Mixed Analyst Estimates

Analysts expect TOST’s revenue for the third quarter (ending September 2024) to increase 25.2% year-over-year to $1.29 billion. The consensus EPS estimate of $0.01 for the current quarter, compared to a loss per share of $0.06 in the previous year’s period. Also, the company has topped consensus revenue and EPS estimates in three of the trailing four quarters.

In addition, Wall Street expects the company’s revenue and EPS for the fiscal year (ending December 2024) to grow 26.6% from the previous year to $4.89 billion. However, the company is expected to report a loss per share of $0.09 for the ongoing year.

Elevated Valuation

In terms of forward non-GAAP P/E, TOST is trading at 55.44x, 364.8% higher than the industry average of 11.93x. Similarly, the stock’s forward EV/EBIT of 44.26x is 280.3% higher than the industry average of 11.52x. Its forward Price/Book of 9.70x is 701.8% higher than the 1.21x industry average.

Also, the stock’s forward EV/EBITDA and Price/Cash Flow multiples of 41.99 and 54.59 are significantly higher than the industry averages of 11.04 and 13.76, respectively.

Decelerating Profitability

TOST’s trailing-12-month gross profit margin of 22.66% is 62.4% lower than the industry average of 60.24%. Likewise, its trailing-12-month EBITDA margin of negative 2.07% compared to the 22.39% industry average. Also, the stock’s trailing-12-month levered FCF margin of 8.18% is 54.1% lower than the industry average of 17.83%.

Moreover, the stock’s trailing-12-month ROTC and ROTA of negative 6.01% and negative 6.31% are lower than the industry averages of 6.95% and 1.06%, respectively.

POWR Ratings Reflect Uncertainty

TOST’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, translating to a Neutral in our proprietary system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. TOST has an A grade for Growth, consistent with its solid financial performance in the last reported quarter. It has a C grade for Sentiment, justified by mixed analyst expectations.

However, the stock has a D grade for Value, in sync with its higher-than-industry valuation.

TOST is ranked #27 out of 39 stocks in the B-rated Software – Business industry.

Beyond what I have stated above, we have also given TOST grades for Momentum, Stability, and Quality. Get access to all the TOST ratings here.

Bottom Line

TOST has demonstrated impressive growth in revenue and customer acquisition, solidifying its position as a key player in the restaurant technology space. The company’s innovative all-in-one platform and strategic expansions have contributed to its solid financial performance and market growth.

However, the challenges of achieving consistent profitability and navigating a highly competitive market cannot be overlooked. Considering TOST’s elevated valuation and uncertain near-term outlook, waiting for a better entry point in this stock seems wise now.

Stocks to Consider Instead of Toast Inc. (TOST)

Given its near-term uncertain prospects, the odds of TOST outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these A-rated (Strong Buy) stocks from the Software – Business industry instead:

Amdocs Ltd. (DOX)

VMware Inc. (VMW)

F5 Inc. (FFIV)

For exploring more A and B-rated software stocks, click here.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

TOST shares were trading at $24.72 per share on Friday afternoon, up $0.09 (+0.37%). Year-to-date, TOST has gained 35.38%, versus a 18.48% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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