Toast Stock Jumps After Growing Revenue 31% and Raising Guidance. Is It Too Late to Buy the Stock?
Shares of Toast (NYSE: TOST) soared higher after the restaurant-focused fintech company reported strong first-quarter results and increased its guidance.
With the stock up over 45% year to date, is it too late for investors to jump on board? Let's look at the company's most recent quarterly results, future prospects, and valuation to find the answer.
A stellar Q1 and increased guidance
Toast saw its Q1 revenue climb 31% to $1.08 billion. Subscription revenue jumped 41% to $141 million, while financial technology revenue rose 30%. Its annual recurring revenue (ARR), which consists of its subscription revenue and its fintech gross profits annualized for the entire year, climbed 32% to $1.3 billion.
Toast saw its gross payment volume (GPV) rise 30% to $34.7 billion. This is how much in payments the company processes for its restaurant customers. The total number of locations using its solution grew 32% to 112,000, with the company adding 6,000 new locations in the quarter. This indicates that its customers saw the most pressure on the same-store sales front, but generally held up well despite weather impacts in January.
The company reported $57 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), compared to a negative $17 million a year ago. But its operating cash flow and free cash flow both remained in the red at $20 million and $33 million, respectively.
Looking ahead, Toast increased its full-year forecast for both revenue and adjusted EBITDA. It now expects subscription services and fintech gross profit to be in a range of $1.325 billion to $1.345 billion, representing 24% to 27% growth. Adjusted EBITDA is now projected to come in between $250 million and $270 million. Toast previously guided for subscription services and fintech gross profit to be in a range of $1.3 billion to $1.32 billion and adjusted EBITDA to be between $200 million and $220 million.
Image source: Getty Images.
Moving forward, Toast continues to drive growth by expanding both within its core U.S. restaurant vertical as well as by growing internationally and moving upstream into enterprise. The company has entered the U.K., Ireland, and Canada, and in the quarter just launched integrated online ordering capabilities in these markets.
It also just launched an enterprise tier of its Management Suite, which it will look to use to increase its enterprise customer base. The company said its pipeline in this segment is strong and it plans to increase penetration in this segment of the market over time.
Innovation continues to be a big driver for Toast, and on that end, the company has launched an AI-powered writing assistant that has been incorporated within its Marketing Suite. Importantly, earlier this year Toast switched to a suit-based go-to-market strategy, where it bundles several of its products together in various tiered suites. This has simplified the sales process and is helping drive growth and customer adoption.
The company also plans to take price in its fintech segment in the second half of the year. However, it said it wouldn't have a meaningful impact this year, but would build over time.
Toast has also been looking to better balance strong revenue growth with more cost discipline. On that front, it was able to lower its general and administrative expenses by -13%, excluding one-time charges related to Toast Capital.
Currently, the company is doing a great job of balancing growth with expense controls, which has lead to positive EBITDA and which should soon lead to positive earnings as well.
Is it too late to buy Toast's stock?
In my view, the best way to value Toast is based on its projected 2024 ARR, as its fintech revenue is low margin. ARR is more akin to the high-margin revenue generated by software-as-service (SaaS) companies. SaaS companies tend to be valued based on a multiple of sales, as they generally invest back into their businesses through sales and marketing to continue to drive more customer growth. Subscription businesses tend to be sticky, and sales and marketing expenses can theoretically be dialed back as companies mature.
If its momentum continues, Toast's ARR will likely come in at around $1.35 billion this year, which is around the high end of its guidance. With an enterprise value (EV) of about $13.7 billion, which takes into account its $1.1 billion in net cash, the company trades at an EV-to-ARR multiple of 10 times.
For a fintech company growing its ARR in the high 20% to low 30% range, that valuation is still quite attractive. With only about 13% market share in U.S. restaurants, Toast has a very long runway of growth ahead of it, both in the U.S. as well as expanding more internationally. And of course, it still has a large upsell opportunity with its current customer base as well.
As such, it is not too late to buy Toast's stock, which should continue to be a solid growth stock to own over the long term.
Should you invest $1,000 in Toast right now?
Before you buy stock in Toast, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Toast wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $550,688!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of May 13, 2024
Geoffrey Seiler has positions in Toast. The Motley Fool has positions in and recommends Toast. The Motley Fool has a disclosure policy.
