With the prospect of the Federal Reserve embarking on a path of lowering interest rates in the near term, investors might be eyeing businesses that have better growth prospects as a result. Toast (TOST -1.78%) certainly falls into this category.
Since its initial public offering in late 2021, shares of the restaurant technology specialist have struggled and are currently off by 53% from their all-time high, which was established in November 2021. But this year the stock is gaining steam once again.
So is it time now to buy this growth stock?
Customer value proposition
Toast provides a wide range of products and services that cater specifically to the needs of the restaurant industry. Besides point-of-sale hardware systems that accept payments, customers can handle loyalty programs, manage staff, run marketing campaigns, and access working capital loans, among many other offerings.
Because the business focuses exclusively on restaurants, it has developed expertise in serving this specific customer group. And based on its growth thus far, Toast is clearly adding tremendous value to its clientele.
During the three-month period that ended June 30, the business posted 27% year-over-year revenue growth. Even in uncertain economic times, that gain is impressive. That fiscal second-quarter sales total of $1.2 billion was nearly 3 times higher than in Q2 2021.
This top-line growth has been driven by notable customer additions. Toast counts 120,000 restaurant locations as its user base. That's up 29% from just 12 months ago.
Toast's positive attributes
The company's growth trajectory is hard to ignore. However, there are other compelling traits that investors should keep in mind. For starters, annual recurring run-rate revenue of $1.5 billion is increasing at a faster clip than the business overall. This includes subscription and payment processing services.
It's difficult to know for sure without obtaining data on churn levels, but I think a valid argument can be made that Toast benefits from some switching costs, as is the case with many software enterprises. Once restaurants get onboarded with Toast's suite of products and services, they might be less inclined to change to different providers.
Toast also highlighted in its May investor day presentation how it helped one restaurant client run payroll 90% faster, while markedly increasing the number of orders delivered in under 10 minutes. If the business can improve sales and profitability, or bolster operations in other ways, for other customers, I doubt these restaurants would have any intention of switching away from Toast's offerings.
Toast still has a huge growth runway ahead of it. There are an estimated 875,000 restaurant locations in the U.S. and 15 million globally (excluding China). And in total, restaurants will spend over $110 billion on technology investments this year worldwide. As a highly regarded service provider, Toast is in a favorable position to capture this opportunity.
Investors might be surprised to know that Toast is profitable. It posted $14 million in net income in Q2. While not a significant sum on its own, this was a huge improvement from the $98 million net loss in the same period a year ago.
It's easy to have confidence that Toast's bottom line will expand at a faster rate than revenue going forward. Despite such a huge surge in sales between the second quarter last year and the same period this year, operating expenses actually declined by $7 million. As a software business, Toast surely has the ability to leverage its expenses further going forward.
Consider the valuation
Shares of Toast have been on an absolute tear this year, up 70%, easily crushing the broader market indexes. But they still trade at a price-to-sales (P/S) multiple of 3.9, which is reasonable for a profitable and growing enterprise like this one.
To be clear, the valuation isn't as compelling as it was at the start of this year -- the stock sold for a P/S ratio of 2.2 in January. But investors with a long time horizon should still consider taking a bite out of Toast stock right now.
