Toast (NYSE:TOST) Exceeds Q3 Expectations, Stock Jumps 20.7%

TOST Cover Image — Toast (NYSE:TOST) Exceeds Q3 Expectations, Stock Jumps 20.7%

Petr Hu??ák

Thu, Nov 7, 2024, 2:04 PM 5 min read

Revenue: $1.31 billion vs analyst estimates of $1.29 billion (in line)
EPS: $0.07 vs analyst estimates of $0.01 ($0.06 beat)
EBITDA: $113 million vs analyst estimates of $78.53 million (43.9% beat)
EBITDA guidance for the full year is $357 million at the midpoint, above analyst estimates of $305.2 million
Gross Margin (GAAP): 24.7%, up from 22% in the same quarter last year
Operating Margin: 2.6%, up from -5.7% in the same quarter last year
EBITDA Margin: 8.7%, up from 3.4% in the same quarter last year
Free Cash Flow Margin: 7.4%, down from 8.7% in the previous quarter
Annual Recurring Revenue: $1.55 billion at quarter end, up 27.6% year on year
Market Capitalization: $18.06 billion

“Toast delivered a strong third quarter, adding approximately 7,000 net new locations, growing our recurring gross profit streams1 35%, and achieving Adjusted EBITDA of $113 million. We are well positioned to finish out the year strong and carry this momentum into 2025. Our differentiated vertical software platform is at the foundation of that success, and we continue to innovate to deliver more value to our customers: this fall we launched new products like Branded Mobile App and SMS Marketing alongside over a dozen feature updates,” said Toast CEO and Co-Founder Aman Narang.

Company Overview

Founded by three MIT engineers at a local Cambridge bar, Toast (NYSE:TOST) provides integrated point-of-sale (POS) hardware, software, and payments solutions for restaurants.

Hospitality & Restaurant Software

Enterprise resource planning (ERP) and customer relationship management (CRM) are two of the largest software categories dominated by the likes of Microsoft, Oracle, and Salesforce.com. Today, the secular trend of mass customization is driving vertical software that customizes ERP and CRM functions for specific industry requirements. Restaurants are a prime example where a set of customized software providers have sprung up in recent years to create unique operating systems that blend tax and accounting software, order management and delivery, along with supply chain management. Hotels and other hospitality providers are another example.

Sales Growth

A company’s long-term performance is an indicator of its overall business quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for multiple years. Over the last three years, Toast grew its sales at an incredible 48.1% compounded annual growth rate. This is encouraging because it shows Toast’s offerings resonate with customers, a helpful starting point.

This quarter, Toast’s year-on-year revenue growth of 26.5% was excellent, and its $1.31 billion of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 23% over the next 12 months, a deceleration versus the last three years. Still, this projection is noteworthy and shows the market is baking in success for its products and services.

Here at StockStory, we certainly understand the potential of thematic investing. Diverse winners from Microsoft (MSFT) to Alphabet (GOOG), Coca-Cola (KO) to Monster Beverage (MNST) could all have been identified as promising growth stories with a megatrend driving the growth. So, in that spirit, we’ve identified a relatively under-the-radar profitable growth stock benefitting from the rise of AI, available to you FREE via this link.

Annual Recurring Revenue

Investors interested in Toast should track its annual recurring revenue (ARR) in addition to reported revenue. While reported revenue for a SaaS company can include low-margin items like implementation fees, 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.

Over the last year, Toast’s ARR growth has been fantastic, averaging 31% year-on-year increases and punching in at $1.55 billion in the latest quarter. This performance was in line with its revenue growth 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.

Customer Acquisition Efficiency

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

It’s relatively expensive for Toast to acquire new customers as its CAC payback period checked in at 101.6 months this quarter. The company’s performance indicates that it operates in a competitive market and must continue investing to maintain its growth trajectory.

Key Takeaways from Toast’s Q3 Results

We were impressed by Toast’s optimistic EBITDA forecast for next quarter, which blew past analysts’ expectations. We were also glad its gross margin improved. On the other hand, its ARR (annual recurring revenue) missed analysts’ expectations. Zooming out, we think this was a solid quarter. The stock traded up 20.7% to $39.42 immediately after reporting.

Toast put up rock-solid earnings, but one quarter doesn’t necessarily make the stock a buy. Let’s see if this is a good investment. The latest quarter does matter, but not nearly as much as longer-term fundamentals and valuation, when deciding if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.

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