If you look hard, you can still find quality companies to buy. Toast (NYSE: TOST) notably just reported financial results that the market cheered, with shares rising 13% immediately after the announcement.
Digging a little deeper, there’s a lot to like about this company and the direction it’s moving in, even if the growth stock is down 58% from its all-time high. Here’s why it’s still a smart buy right now.
Penetrating a huge industry
On a high level, Toast responds to the specific needs of restaurants. This means providing hardware and software solutions for things like payment processing, omnichannel ordering, loyalty programs, employee payroll, and accounting. Toast is essentially a leading provider of operating systems for owners and operators, with the goal of making running a restaurant as seamless as possible.
The good news is that the opportunities for Toast are truly enormous. There are a total of 860,000 restaurant locations in the US, 112,000 of which are already customers of the company. That figure increased by 32% year over year. If the company can make significant progress in international markets, its expansive runway is even greater, as there are 22 million restaurant locations worldwide.
Revenue rose 31% in the first quarter to a total of $1.1 billion. That was better than consensus expectations from Wall Street analysts. Just three years ago, Toast posted $282 million in revenue in the first quarter of 2021, so it’s clear the company is catching on with restaurants.
Management’s goal is to generate greater recurring revenue, from things like subscriptions and payments, to add more stability and predictability to the business. On an annual basis, this segment achieved $1.3 billion in revenue, up 32% from the first quarter of 2023.
Go to the bottom line
Toast’s growth has been nothing short of impressive, especially considering the uncertain economic environment we find ourselves in. However, the company leaves a lot to be desired when it comes to its bottom line. In its latest quarter, Toast reported a net loss of $83 million, roughly in line with the same period a year ago.
I’m generally skeptical of companies that don’t generate consistent profits. In my opinion, this poses a lot of risk to investors as it shows that the business model has not yet proven itself. Moreover, it is always difficult to say exactly when a positive net result will be achieved.
However, I’m willing to give Toast the benefit of the doubt. The reason is that the company is developing one economic moat This is because customers have high switching costs.
Put yourself in the shoes of a restaurant owner. You, your team and your customers are all fully aware of Toast’s offering. Things are going smoothly and there have been no problems.
In this scenario, you are unlikely to switch to a competitor’s products and services, even though they may be cheaper. Imagine the messy process of switching from Toast and onboarding a new system at the same time. That seems like a difficult task.
This gives me confidence that Toast has staying power, especially as its customer base remains somewhat locked down. So, as sales continue to rise rapidly, the hope is that the company can eventually start generating outsized profits.
Lots of benefits
The market isn’t asking investors to pay for Toast. Stock trading at a price-sales ratio of 3.5, which is well below the historical average of 4.7.
Given the moat I just discussed, coupled with a huge growth opportunity, Toast stock appears to offer plenty of upside potential for long-term investors.
Should You Invest $1,000 in Toast Now?
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Neil Patel and his clients have no positions in the stocks mentioned. The Motley Fool holds and recommends positions in Toast. The Motley Fool has a disclosure policy.
1 Growth Stock Down 59% to Buy Right Now was originally published by The Motley Fool
