Purchase Toast Stock. It's Not Just Restaurant Payments, Either.

Americans who have eaten in restaurants abroad are accustomed to having their credit cards swiped at their table by a waiter using a hand-held device. It differs from the custom, prevalent in the United States, of handing over your card, waiting anxiously while the waiter enters the transaction into a point-of-sale system in the restaurant's back, and then returning with a printed receipt for you to sign.

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Thanks to next-generation service providers like Toast TOST +0.04%, Block SQ -5.00%, and Fiserv FISV +0.30%, American diners are finally experiencing the more frictionless experience enjoyed by their international counterparts (TOST). The most noticeable elements to customers are sleek terminals for collecting orders and payments, but Toast also contains a collection of software that intends to serve as an operating system for dining establishments. In the kitchen and dining area, it eliminates analog or labor-intensive operations, saving time and effort for both employees and patrons.

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Criterion Thornton, a 30-year veteran of the food business in New York City who is currently general manager at Brooklyn's Ingas Bar, a neighborhood pub that serves seasonal fare such as duck poutine croquettes, declares that "the efficiency is clearly on another level." Its real strength is how intuitive the components are.

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Toast is used by Ingas to process orders and payments, manage its gift card and rewards program, track employee hours, and manage payroll for its 30 or so employees. In addition, Toast provides capabilities for working capital loans, digital ordering and delivery, and inventory management. The business wants to be a one-stop shop for restaurants looking to use technology to boost productivity and enhance the dining experience for both patrons and staff.

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An established sector with narrow profit margins and picky consumers is undergoing a digital shift thanks to Toast. The company's singular emphasis on restaurants distinguishes it from rivals like Square or Clover, which provide platforms that can be utilized for any industry. Approximately 74,000 restaurants, or 9% of the estimated 860,000 restaurants in the United States, presently employ its goods. It charges a fee for each transaction it handles and charges customers for access to its software services.

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In the stock market, Toast hasn't had it easy. The company went public in September 2021 at a price of $40 per share, just before the pandemic bull market's zenith. The company was founded in 2011. The stock increased to a peak of $65 in the ensuing months before dropping to just $12 last year. Since then, it has returned to the low $20s, giving Toast a market valuation of roughly $12 billion, including nearly $1 billion ($2 per share) in net cash on the balance sheet.

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The available funds ought to be sufficient to cover Toast's road to profitability. From 2023 to 2025, analysts predict a total net loss of over $600 million, followed by positive profits in 2026. EBITDA stands for earnings before interest, taxes, depreciation, and amortization. According to management, Toast will become profitable on this metric in 2023, although Wall Street anticipates a little full-year EBITDA loss but a gain in the second half. Revenue is predicted by The Street to increase from $2.7 billion in 2022 to $6.7 billion in 2026.

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That's a lot of growth, and since processing payments is a scale industry, profit margins will increase as more restaurants use Toast's readers to handle more transactions. Similar may be said for many of its software-as-a-service products. The cost of acquiring new customers should decline as a share of total sales as Toast's customer base expands, and the average revenue per user may rise over time as restaurants add more services.

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Gregg Fisher, founder and portfolio manager at Quent Capital, a global small-cap fund with around $1 billion under management, believes that "this is a perfect example of a small company in the pricey land grab phase [of its growth]." "Getting a customer up and running requires significant acquisition costs, but once they do, they stay for a while. Toast will start to turn a profit as it expands.

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The most recent reported quarter from Toast demonstrates this operating leverage: Total revenue increased by 55% year over year to $752 million on growth in subscriptions of 60% and payments volume of 53%, respectively. Gross profit for the company increased 82% to $151 million with a 20% margin. In the quarter, it spent $80 million on cash burn.

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This expansion is the result of more eateries joining up and more restaurants using the service. At the end of the third quarter, around 62% of Toast's customers used at least four of the approximately 15 subscription services that were offered, up from 46% two years prior.

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In the future, "We expect them to acquire market share," says Jeff Cantwell of Wells Fargo. "That is a result of them having very high-quality software and payment platforms. Therefore, we anticipate both the potential to increase profit margins as they increase and quicker revenue growth than peers.

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Over the next five years, Cantwell anticipates that Toast will gain a market share of 30% of small and medium-sized restaurants in the United States, or close to 200,000 establishments. With a $27 price target, he rates the company as a Buy, up 15% from Wednesday's finish. Due to Toast's potential for faster development, this valuation is higher than Block's 2.2 times and Lightspeed Commerce LSPD -1.74% (LSPD) two times, which are based on Cantwell's estimated revenue for 2023.

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Toast benefits both customers and establishments equally. Although so far it hasn't been for its public investors, its future appears more enticing.