Toast (TOST): Buy, Sell, or Hold Post Q2 Earnings?

Over the past six months, Toast has been a great trade, beating the S&P 500 by 6.4%. Its stock price has climbed to $40.99, representing a healthy 22.4% increase. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Following the strength, is TOST a buy right now? Or is the market overestimating its value? Find out in our full research report, it’s free.

Why Does Toast Spark Debate?

Born from the frustrations of three friends waiting too long for their restaurant bill, Toast (NYSE:TOST) provides a cloud-based digital technology platform with software, payment processing, and hardware solutions built specifically for restaurants.

Two Positive Attributes:

1. ARR Surges as Recurring Revenue Flows In

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

Toast’s ARR punched in at $1.93 billion in Q2, and over the last four quarters, its year-on-year growth averaged 30.8%. This performance was fantastic and shows that customers are willing to take multi-year bets on the company’s technology. Its growth also makes Toast a more predictable business, a tailwind for its valuation as investors typically prefer businesses with recurring revenue.

2. Projected Revenue Growth Is Remarkable

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite, though some deceleration is natural as businesses become larger.

Over the next 12 months, sell-side analysts expect Toast’s revenue to rise by 21%. While this projection is below its 35.8% annualized growth rate for the past three years, it is healthy and suggests the market sees success for its products and services.

One Reason to be Careful:

Long Payback Periods Delay Returns

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Toast’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a competitive market and must continue investing to grow.

Final Judgment

Toast’s merits more than compensate for its flaws, and with its shares outperforming the market lately, the stock trades at 3.7× forward price-to-sales (or $40.99 per share). Is now the right time to buy? See for yourself in our comprehensive research report, it’s free.

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