The market has had a fantastic year in 2024. Investors are adopting a more bullish tone, which has lifted certain stocks more than others.
One such company to pay attention to is Toast (TOST -0.07%). In 2024, shares have soared 134% (as of Nov. 22). Does this mean it’s time to buy this supercharged stock right now?
Growth story
Toast is making a name for itself by catering specifically to the needs of restaurant owners, managers, and employees. The company provides various hardware, software, and financial services offerings that work seamlessly together, making running a restaurant a much smoother task.
Growth is a key part of Toast’s story. In the first nine months of 2024, the company generated $3.6 billion in total revenue. That figure was up 28% from the same period of 2023. According to Wall Street consensus analyst estimates, Toast’s top line will increase at a compound annual rate of 22% between 2024 and 2026.
The company does well when it can sign up new customers, as this results in more sales. After adding 7,000 in the last three months, Toast now boasts having 127,000 restaurant locations as its customer base. This gives it more than 14% share in the U.S. and less than 1% share internationally, so there is still a sizable runway to capture more customers.
You typically don’t see earlier-stage, fast-growing enterprises posting profits. But Toast is different. It produced $56 million in net income in Q3. That was a huge reversal from the $31 million net loss during the same period last year. Investors should watch to make sure Toast remains consistently profitable while it continues to grow. This is the sign of a scalable and financially sustainable business model.
Developing a moat
Investors who plan to own stocks for the long haul should try to identify businesses that possess an economic moat. This is a single competitive advantage or a combination of competitive advantages that allow a company to outperform rivals and fend off new industry entrants. A moat is quite literally what helps a business stand the test of time.
Toast is a relatively young company, having been founded about 13 years ago. However, I think it benefits from switching costs, which could be its moat. Because management doesn’t provide data on churn, it’s obviously difficult to gauge how sticky Toast customers are.
But I’d suspect that customers of Toast, especially those that use multiple product features, face significant friction if they try to change to those offered by another company. As long as Toast can continue delivering an exceptional experience to its current restaurant roster, while also being a mission-critical service provider, it should be fine. The fact that 75% and 20% of new customers come from inbound marketing channels and referrals, respectively, is a clear indicator of the positive impact the business is having.
Toast’s valuation
Even though shares of Toast have catapulted over 130% higher just this year, they still are 34% off their all-time peak. That record was established about three years ago at the end of the 2021 raging bull market.
Investors looking to buy the business must be OK paying a price-to-sales ratio of 5.2. This valuation is not nearly as compelling as it was earlier in the year, when it was about half the current multiple. And it showcases the market’s growing optimism surrounding Toast and its prospects. I don’t believe there is meaningful margin of safety at this level.
If you’re an investor who cares more about growth than the price you pay, then it’s understandable why you’d want to buy this stock. For those who are more value-focused, passing on Toast should be an easy decision.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Toast. The Motley Fool has a disclosure policy.
