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A growth stock I've had my eye on for some time is Toast (NYSE: TOST).
The shares went public in September 2021 at $40. However, after flying out of the traps and hitting $59, they have since been halved and are currently trading for $24.
Here's why I think some on Wall Street might be missing a trick.
The Shopify of restaurants
Toast provides a leading cloud-based restaurant management platform. It is an all-in-one operating system that includes point-of-sale devices and various software tools for marketing, online ordering, accounting, and setting up loyalty programs.
It also offers loans to eligible customers ranging from $5,000 to $300,000.
Basically, Toast takes care of all the things behind the scenes so that restaurants can focus on providing their customers with the best service possible.
In this sense it reminds me of buywhich provides the digital infrastructure that allows businesses to easily set up and manage online stores.
Once a restaurant integrates into the Toast system, I imagine they would be very cautious about changing suppliers. So, in addition to recurring revenue, there is a competitive advantage in the form of high switching costs.
A backlash over tariffs
Now, it's worth noting that Toast had to cut half its workforce in the first half of 2020 when its customers were forced to close during the pandemic. Therefore, another health emergency is a key risk.
Additionally, there was an uproar last summer after the company added a $0.99 processing fee to online orders over $10. He was putting this on customers' bills without the restaurant owners' consent.
However, due to the backlash, management quickly removed the fee from its digital ordering channels. However, there was some reputational damage.
Tasty growth
However, it is important to note that this mishap has not negatively affected the company's customer growth. It added more than 6,500 net new restaurants in the fourth quarter, bringing its total to approximately 106,000 locations by the end of 2023.
Annual revenue grew 42% year-over-year to $3.9 billion, while gross profit rose 63% to $834 million. Its annualized recurring run rate (ARR), which includes subscriptions, increased 35% to more than $1.2 billion.
However, Toast remains unprofitable, posting an annual net loss of $246 million. This doesn't worry me right now, as the company is still in growth mode and focused on customer acquisition.
Looking ahead, brokers predict revenue will grow in the mid-20% range to reach $5.9 billion by the end of 2025.
This puts the stock at low forward price-to-sales multiples of 2.54 and 2.07 for 2024 and 2025, respectively.
But analysts are also forecasting net income of $377 million by 2025. If accurate, this gives the stock a forward price-to-earnings (P/E) ratio of around 35. I think that's attractive given the tremendous growth potential here.
I am very interested
Toast estimates that there are 860,000 restaurants in the United States alone. Globally, there are around 22 million, suggesting there is plenty of room to grow beyond the current 106,000.
In fact, it appears to be barely scratching the surface of its long-term market opportunities.
However, analysts have a 12-month consensus price target of just $24, the current level. Only 13 of 26 analysts rate it as a buy.
Therefore, I think Wall Street could be seriously underestimating this growth stock. So I promoted it to my own shopping list.
