After Three Guidance Raises, Toast Must Prove Record Location Growth Can Outrun Memory Costs

Toast enters its third-quarter report with an awkward contradiction. Management has raised its full-year outlook three times in a row, posted a record quarter of new restaurant locations and talked up a new agentic AI product with real conviction. Yet the stock has fallen 8.4% since the last report, trailing the S&P 500 by about seven percentage points. The business narrative is getting stronger while the share price is not, and the November 3 release after the close is the next chance to show which one is reading the situation correctly.

The Street expects non-GAAP earnings of $0.37 per share on revenue of about $1.96 billion, which would be roughly 20% growth from the $1.63 billion reported a year ago. That is strong growth for a company of this size, but it also marks only a modest sequential step up from the $1.91 billion delivered last quarter. The Earnings Whisper sits at $0.41, a meaningful cushion above consensus, which suggests the more engaged part of the market expects another beat rather than a clean match.

The guidance progression sets the bar. Toast opened the year expecting recurring gross profit growth of 20% to 22%, nudged that to 21% to 23%, then lifted it to 23% to 25% last quarter. Adjusted EBITDA guidance climbed in parallel to $805 million to $825 million. When a company raises that steadily, a simple reiteration can look like a stall. The cleanest validation would be a fourth raise, or at least evidence that recurring gross profit streams are still growing near the 28% pace seen last quarter. Management has already signaled that it is reinvesting upside, including a roughly $10 million tariff refund, so EBITDA raises may continue to trail the size of any beat. That is a deliberate choice, but it caps how much margin expansion shows up this year.

Location growth is the engine to watch. Net adds hit a record 9,500 last quarter, about 1,000 above the previous high, lifting the base to roughly 180,000 locations. A figure well below that would raise questions about whether the second quarter was a pull-forward. The newer markets matter here too. Enterprise, international and retail are on track to nearly double annual recurring revenue to $200 million this year, and wins such as Kung Fu Tea, Best Western and TGI Fridays UK, along with a first fuel payments launch, should begin to show up as tangible progress. Toast IQ Grow, described as the fastest product the company has ever taken to $10 million in ARR, needs follow-through to support the broader roadmap into scheduling, payroll, bookkeeping and voice.

The risks are concrete. Memory chip inflation, a hardware headwind of around 150 basis points flagged since late last fiscal year, is expected to hit 2027 harder than 2026, so any commentary on mitigation or pricing will be closely parsed. Free cash flow of $130 million last quarter declined from a year earlier because Toast chose to stockpile hardware inventory, and $29 million of bad debt and credit-related expense was excluded from operating costs. Spending per location has been flat to slightly down, so growth is coming from more restaurants rather than busier ones.

Sentiment has cooled modestly, with bullish readings slipping to 10.4% from 14.4% heading into the prior report. The stock sits at $32.13, above its 200-day average near $29.45 but in the lower half of its post-earnings range of $28.70 to $37.20, so it is far from a breakout. The central question is whether Toast can keep adding locations at a record clip while showing that memory costs and inventory-driven cash flow pressure are manageable. If both hold, the gap between the business and the stock becomes hard to justify.

This earnings preview was originally published on Earnings Whispers.

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