Toast: Strong growth prospects but competition intensifies (NYSE: TOST)

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Cloud-based restaurant management software company Toast (New York Stock Exchange: TOST) experienced sustained growth; for the fiscal year ended December 2021, revenue soared 107% year-on-year to $1.7 billion, and GPV jumped 124% year-on-year to $57 billion. The toast was used in about 57,000 restaurants by the end of the year.

The momentum continued into 2022. For the quarter ended June 2022, total locations climbed 40% year-over-year to approximately 68,000, and revenue jumped 58% year-over-year to $657 million. Overall profitability improved in the quarter, with net losses falling to $54 million from $135 million in the same quarter a year earlier. The outlook for the year ahead appears solid, with management raising its full-year revenue guidance, with full-year revenue expected to be between $2.62 billion and $2.66 billion (from 2. 5 billion USD to 2.55 billion USD previously).

Longer term, there are reasons to be optimistic about Toast’s prospects, with the company poised to benefit from several tailwinds.

Restaurant location growth and increased product adoption by existing customers

The pandemic has accelerated restaurants’ adoption of new technologies, including in the areas of omnichannel ordering, delivery, and rewards, among others, a trend that has benefited cloud POS providers such as Toast and Olo. (OLO). Post-pandemic, there are several factors to support continued adoption going forward, including the continued decline in restaurant profitability (restaurant margins have been declining for years), labor shortages, and rising inflation that should encourage restaurants to invest in technological improvements to reduce costs, increase operational efficiency and improve the customer experience. Additionally, cloud POS market penetration in restaurants has surpassed 20% in the United States (a critical figure according to the diffusion of innovation theory, which transforms a new technology from an innovative innovation used by few early adopters into more ubiquitous technology with wider acceptance).

With roughly 50% of the roughly 800,000 U.S. restaurants expected to adopt cloud POS by 2022, that leaves an untapped market of thousands more restaurants. Toast, with 68,000 locations, has a market share of approximately 7% of restaurants in the United States, and further gains could be possible if the company actively expands its product offerings through a combination of acquisitions and R&D to strengthen its value proposition and market positioning. Toast management, for example, pointed out in their last earnings call that their success rate was higher when quoting with Sling than without (Sling is an employee management solution they acquired in July 2022, the addition of Toast’s platform has made the platform more attractive in a tight job market).

The company has made acquisitions lately (apart from Sling, Toast acquired restaurant inventory management solution provider xtraCHEF in 2021) and it has actively invested in R&D in areas such as innovation product (20% of its R&D budget is invested in medium and long-term growth initiatives) and product development (such as developing the stability and scalability of the platform to support hundreds of thousands of restaurants in the years to come”). While a rising interest rate environment may dampen their appetite for new acquisitions, their relatively low leverage (their total debt to equity ratio is around 8%) gives them some flexibility to make acquisitions. if necessary.

Toast

Fiserv

Speed ​​of light

To block

Olo

Total debt to equity %

8.00%

67.30%

1.74%

31.28%

2.77%

Quick report

2.73

0.32

5.28

1.16

9.54

Additionally, an expanding portfolio of software solutions and upselling efforts to increase adoption of their full suite of products by existing customers can also drive revenue growth and profits; Toast noted that the number of Toast locations using four or more core products in addition to Toast’s integrated point of sale reached 59% in December 2021, compared to approximately 48% at December 31, 2020 and approximately 37% at December 31, 2019. .

Corporate clients and international ambitions

Toast aims to capture a share of enterprise customers. The segment has its share of strong rivals, from established players such as Oracle (ORCL) and NCR (NCR) to newer players such as Olo (which has a first mover advantage over Toast with years of experience serving customers company and has 500 customer restaurant brands and 79,000 catering establishments using their platform). Toast does, however, have the advantage of a relatively broader product offering (from point-of-sale and payroll to inventory management and capital) compared to Olo, whose solutions are largely centered on online ordering, which which can help Toast gain traction in the enterprise segment.

Another focus area of ​​Toast’s growth strategy is international expansion (no significant revenue was realized outside of the United States in 2021). While international growth presents a significant market opportunity (the global restaurant management software market is expected to grow at double-digit rates over the next several years), the company has limited overseas operational experience and efforts are at a very early stage and therefore it remains to be seen how successful this effort would be.

Risks

Short-term risk related to restaurant closures and bankruptcies. The majority of Toast’s customer base includes SMBs who are more vulnerable to macro headwinds and rising interest rates, which could result in significant churn for Toast, while any reduction in consumer spending in restaurants could affect the GMV of payments and therefore impact revenue from fintech solutions which accounted for 82% of the company’s revenue in 2021). An inflation report from data analytics firm First Insight found that dining out topped the list of consumer inflation-related spending cuts.

In the longer term, competitive risks could dampen Toast’s growth prospects. The SMB cloud restaurant management space is already teeming with competitors like Touchbistro, Lightspeed (LSPD), and Global Payments (GPN) Vital, to name a few. At the same time, new entrants are strengthening their presence in the segment; Company restaurant SaaS company Olo is increasingly pursuing SMBs, while SMB-focused restaurant management software provider Clover, owned by Fiserv (FISV), doubles its restaurant space with its acquisition of the SMB-focused digital storefront solution provider BentoBox last year. Clover has now fully integrated BentoBox into its own platform, a move that also increases its value proposition and potentially its market share. With Fiserv’s resources at its disposal (Fiserv is profitable while Toast as well as other competitors such as Lightspeed and Olo are not), Clover could emerge as a very formidable competitor on Toast’s turf, limiting the prospects of Toast growth. Fiserv also has the lowest short-term interest among the major restaurant management SaaS players, suggesting the company’s competitive strength and prospects, especially in a rising interest rate environment.

MTT

Toast

Fiserv

Speed ​​of light

Block (SQ)

OLO

Year-on-year revenue growth %

86.15%

10.27%

147%

2.24%

27.40%

Net margin %

-14.95%

11.92%

-56.06%

-3.00%

-22.06%

Return on equity %

-47.70%

6.46%

-12.53%

-5.10%

-5.70%

Short interest

4.13%

1.87%

5.09%

5.47%

15.89%

More daunting threats could emerge from deep-pocketed horizontal cloud giants Microsoft (MSFT), Google (GOOGL) and Salesforce (CRM) which are increasingly releasing their own industry-focused versions of cloud products to counter the erosion of market share for vertical SaaS companies.

Summary

Toast is on a solid growth trajectory and is well positioned to benefit from the industry’s long-term growth. Location growth and increased revenue per location through continued cross-selling could drive growth for the foreseeable future, while its business segment and international expansion ambitions could propel longer-term growth. However, competition is intensifying in an already crowded market, which may limit growth prospects.

Analysts are mostly neutral on the stock.

Toast Analyst Ratings

WSJ

Source: WSJ

Martin E. Berry