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About Toast

Toast.

Some people eat it and some people write about it.

I’m just the silly latter, I suppose.

At any rate, picture this.

I hop on the city bus with a blue birthday card with the name “STEPHEN” written on the front (my handwriting is akin to that of a four-year-old, in case you were wondering), slouching myself near the back because that’s where the most legroom is, I listen to some Allan Holdsworth while the bus goes down Dean Keeton, then it proceeds to take a left on Guadalupe as it subsequently trudges southbound through downtown, hitting a left on Riverside and dropping me off near a semi-unassuming asian bistro, where my friend’s birthday party is being hosted.

I walk through the front entrance of the establishment to essentially find everyone except my friend and proceed to the backside of the restaurant to be greeted by my friend and his friends.

Rookie mistake, I guess.

We walk in, take a seat at our table for eight and while I’m next to completely unfamiliar with everyone else at the table, the chats, laughs and stories ensue and I knew I was hanging out with a great bunch and I also knew I’d get wrapped up in a group chat that would continue far beyond our time at the restaurant.

To my right was a blues and jazz savant who favored legend Otis Redding, directly in front was a recent marketing graduate and guru in the making with the rest of the table composed of a Brit who hardily agreed with me about something during our time at the restaurant but for the life of me I can’t remember what it was, a birthday boy who is an up-and-coming real estate mastermind (that is, if he isn’t already one), a person who had the guts to put the entire meal on their card and accept Venmo payments from others after the fact, a familiar face that I met prior while she was jump starting her career in politics and a guy near the end of the table with a flat-out cool “Have a Nike Day” shirt.

And there it was.

Toast.

No, there wasn’t any bread for the table, but instead I looked over to my left-hand side and instead of a piece of paper and a pen I saw that the rosy-cheeked waitress was about to take our order through a tiny, hand-held computer.

 What a time to be alive.

Am I a nerd for going home and feverishly doing research on this little handheld machine that seamlessly integrated front of house operations with back of house operations with the waitress tapping the screen a few times in taking our orders and within a matter of seconds it being sent like a text message to the restaurant’s chiefs?

I’ll let you be the judge of that.

This is a little financial (and personal) story about Boston, Massachusetts-headquartered Toast Incorporated, which is becoming a sit-down restaurant favorite.

With respect to how Toast generates revenue, it makes money through the sale of both its software and hardware systems and employs a subscription model, which is far from uncommon with software as a service (SaaS) companies, which presents yet another value proposition for a restaurant in that it not only connects the front and back houses but also allows the restaurant managers and/or owners to collect and analyze troves of data that can help them improve sales and operations overall.

In briefly pondering whether or not this company is recession proof, there’s some good and bad in that we think Toast’s products are quite sticky (i.e., once a client starts using them it is highly likely not to go back or get off of the platform), however, one of the main questions is pandemics and their impact on this company, especially given that restaurants (particularly those that are locally owned) were among the most vulnerable businesses when COVID-19 came into play and if folks don’t feel comfortable or simply can’t visit their local favorite dining establishment(s), Toast’s clients are likely to part ways, perhaps indefinitely, with its products because its tablets and other hardware (and software for that matter) aren’t getting much use without customers inside of the restaurant.

Like my combination fried rice from the Asian bistro, this is certainly something to chew on.

Nevertheless, it would be best if we let the numbers speak for themselves and tell us their side of the story, so as to gain a more clear, objective view of the overall financial health of this company and how it is likely to look moving forward.

Whether you’re gluten free or not, get ready for some more Toast.

Toast’s stock financials

In getting things kicked off with this restaurant technology firm, Toast (according to its prevailing market capitalization) is worth a little less than $12 billion (which is equal to around 705 million bowls of combination fried rice, I might add), also maintaining a share price of $21.98 along with not a price-to-earnings (P/E) ratio nor an annually distributed dividend in sight.

As has commonly been the case as of late, these preliminary figures do not surprise us, especially being that Toast is a growing SaaS company and thus needs to retain any and every dollar it can and throw it right back into its business, as being an operator in both the specialized hardware and software arenas means continuous innovation which means continual investment which ultimately means that this company is more than likely burning through some cash and simply can’t afford to shell out a consistent dividend to its shareholder base nor does it have real earnings to display at the moment, thus no readily available price-to-earnings ratio.

So far, we are fine with all of this given the nature of this company’s business and the growth phase it is undoubtedly in at the time of this publication.

With respect to the state of the company’s balance sheet, Toast’s executive team is responsible for just about $1.7 billion in terms of total assets as well as $663 million in terms of total liabilities, which, for an investment-heavy operation littered with hardware and software, is a pretty stellar total asset-total liability breakdown, if you ask us, as it seemingly has a sufficient amount of total assets in relation to its total liabilities, not seemingly running any sort of evident risk of becoming overleveraged.

Onto the company’s income statement, Toast’s recent total annual revenues (specifically referencing since 2019) have been growing like a weed, which is great to see but also sort of to be expected for a SaaS company such as this one in a very defined, focused, and, you guessed it, growing space.

More specifically, Toast’s revenues in 2019 stood at $665 million, rising the following year to $823 million, all the way up to its latest reported figure (displayed on TD Ameritrade’s platform) of $2.7 billion, as reported in 2022.

To us, this signifies two things, both of which are positives.

One, Toast Inc. is retaining current customers that continue paying for the company’s service offerings on a monthly basis as well as the fact that the company is signing on more and more restaurants to its platform, further expanding its reach all over the United States and establishing its presence in new markets, continuing to (to a certain degree) thwart its competitors. This is all good and well, however, what we really need to figure out is how much cash Toast is burning through in order to achieve this amount of rapidly growing revenue, as it can’t be all that inexpensive for a younger company to convert its sales into cash, at least at this moment in time.

Well, if we wander over to the company’s cash flow statement, it can be seen that Toast is most definitely bleeding cash (each year, again, specifically referencing since 2019) on a consistent basis, as each year (except 2021) the company lost around $200 million in terms of net income, with 2021 being an ever more negative exception, as its net income was reported as -$487 million that year.

Candidly, we take some comfort in the fact that its executives have kept its net income and consistent cash flow losses, well, consistent (as opposed to growing even more towards the downside), however, we sure do hope there is a viable path to profitability amidst all of this growth both geographically and technologically as well, however, given the relative state of Toast’s corresponding total annual revenues, it could be a lot worse than it currently is.

As long as this cash bonfire stays consistent and perhaps begins trending upwards (i.e., closer to breaking even) within this decade as revenues continue to rise, we think this company can weather this storm with time and continued growth and financial prudence.

Toast’s stock fundamentals

Obviously, profitability on a net, trailing twelve month (TTM) basis is pretty much not in the cards right now, but this was to be reasonably expected given all of aforementioned factors such as rapid, consistent investment and reinvestment being done at this juncture of time (and the foreseeable future for that matter) as well as the digital and local marketing it is likely focused on continuing to pursue as it aims to acquire more and more restaurant venues onto its platform and services.

The proof is in the combination fried rice.

I mean pudding.

For instance, according to the figures displayed on TD Ameritrade’s platform, Toast’s TTM net profit margin sits well below at -11.37% to the industry’s respective average of 28.7%, which, sure, is a notable discrepancy, however, we thoroughly think that with time and continued market penetration and solid market share gain, the margins will take care of themselves as this company (hopefully) keeps finding ways in which it can cut costs and not quality, which, mind you, is far from a simple task.

Pertaining to the company’s listed TTM returns on both assets and investment(s), Toast’s are, once again, well below that of the competition’s averages, with, as an example, its TTM return on investment taking a ride in the backseat at -30.11% to the industry’s respective average of 16.7%.

Again, we think with time and continued execution, this gap will be bridged and thus handsomely reward shareholders that maintain a longer-term investment horizon.

Should you buy Toast stock? 

Like I said, what a time to be alive.

The school year is back, fall is nigh and one can gain inspiration from Chinese bistros in Austin, Texas.

On a more serious note, Toast itself runs a very intriguing business and has proven time and time again that it can innovate with the best of ‘em.

Its balance sheet is in a good place, its revenues have been growing like hotcakes, its net income and total cash from operations losses have been contained for the most part, its brand is growing, its products are sticky, however, its (net profit) margins aren’t as attractive nor are its core return metrics anything to write home about.

That is, for now.

There are plenty of prominent SaaS companies that are yet to be TTM net profitable and we think, despite its COVID-19-related sensitivities, Toast is well ahead of the restaurant sector technology curve, which we think will help beef up its TTM net profit margin in the years to come, not to mention the general yet vast possibilities with artificial intelligence (AI) and incorporating it into its products, which, to us, are promising.

Therefore, incorporating all of the previously mentioned facts and figures and thinking about the future of technology and the growing restaurant and ghost kitchen spaces and Toast’s presence within these categories, we feel comfortable in giving the company’s stock (NYSE: TOST) a “buy” rating.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.