I’m writing about Toast (NYSE:TOST) on the day after the provider of cloud-based restaurant-management software reported mixed fourth-quarter earnings. Toast stock lost more than 22% of its value on the news.
I intended to write this piece before Humpty Dumpty had a big fall. However, nothing in the firm’s results changes my investment thesis on Toast. If anything, the results strengthen my thesis on TOST because the shares became one-fifth cheaper than before it reported its earnings. As Warren Buffett famously said, “Be greedy when others are fearful and fearful when others are greedy.”
So, as you might guess from the headline of this article, the partnership that Toast announced with Google earlier this month caught my attention. I’ve been very supportive of TOST stock over the past year as TOST worked to further scale its business while moving towards profitability.
By integrating Toast’s Online Ordering with Order with Google, restaurants will obtain new ordering channels that will drive additional sales for them. It’s impossible to deny the importance of this combination for independent restaurants. For them, the combined product could be the difference between success and failure.
However, there are many other reasons besides the Google deal to buy Toast stoc . Here are three such reasons.
It Just Drove Away With This California Tech Biz
Within Toast’s earnings press release, the firm noted that it had acquired Delphi Display Systems, a California-based provider of drive-thru technology and digital-display solutions for quick-service restaurants.
The deal marks another step in Toast’s mission to become restaurants’ best friends. Anything that the firm can do to help restaurants become more efficient is in Toast’s best long-term interests. Delphi’s technology is used by more than 40,000 quick-service restaurants worldwide.
“Delphi’s vision is to transform the drive-thru experience with state-of-the-art innovation,” said Delphi’s CEO, Ken Neeld, in a statement. “We see Toast as a leading restaurant technology platform and a similarly forward-thinking partner, so we couldn’t imagine a better next chapter for Delphi.”
Toast first started working with Delphi in April 2022. The partnership was so successful that the company decided to make it permanent. It is these smaller acquisitions that often generate the biggest returns.
I look forward to seeing how the two companies continue to innovate together. For Toast, this development could be even more important than the Google partnership for advancing its position within the restaurant industry.
Its Earnings Really Weren’t That Bad
Companies’ shares rarely get hammered when they, like Toast, report a 59% increase in annual recurring run-rate revenue ($901 million) in just three months. The fact that TOST tumbled despite that surge says a lot about investors’ sentiment right now.
Consider some of Toast’s accomplishments during 2022. Specifically, last year, it reported:
- A 60% increase in its revenue to $2.73 billion
- A 61% increase in its gross payment volume (GPV) to $91.7 billion.
Moreover, Toast:
- Finished the year with its software in 79,000 restaurant locations.
- Had over $1 billion of cash and marketable securities and no debt as of the end of last year.
- Expects to get very close to delivering its first positive EBITDA, excluding certain items, in 2023.
On Toast’s Q4 earnings conference call, CEO Chris Comparato said, “There are countless examples of how Toast is helping our customers deliver better top and bottom-line results, including Alpine Inn, a tavern in California unlocked a 76% increase in revenue since adding Toast Mobile Order & Pay, driving higher check sizes, a better guest experience and helping manage the labor shortage.”
The best businesses solve problems and make or save consumers and/or companies time and money. Toast does all of that.
Further, Toast does not seem to have any tough, looming competitors, and it is on a roll. Investors who sold TOST stock looked at the wrong Q4 numbers because its business is very healthy.
Toast Is Way Above Its All-Time Low
Since the beginning of 2022, Toast stock has traded in a relatively narrow range between $12 and $25. The days of its all-time highs around $60 are far behind it.
And, despite the tremendous decline that TOST stock suffered in the wake of the firm’s Q4 earnings report, it’s still far above its all-time low of $12.88, set last June. So the investors who bought the stock at its lows and sold it just before the earnings came out doubled their money in eight months
The best is yet to come for the investors who are still holding onto the shares. Those who haven’t yet bitten into this appetizing stock are getting a better deal today than they would have gotten a week ago.
TOST trades at just 3.8 times its 2022 sales and at 2.9 times its 2023 sales guidance of $3.62 billion. When Toast went public in September 2021, investors were willing to pay nearly 12 times its estimated annual sales for the stock.
So, in 18 months, its price/sales multiple has fallen by 68%, while its sales have increased by 60%. And its adjusted EBITDA margin has stayed relatively stable, moving slightly higher from -2.5% in 2021 to 4.2% in 2022.
Covid-19 almost killed Toast. It persevered, and its business has strengthened as a result. Aggressive investors ought to consider taking a bullish position in TOST stock.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.