We have seen several growth stocks lose a significant portion of their market cap in the last few months. Multiple macro-economic factors such as rising inflation rates, interest rate hikes, supply chain disruptions, the omicron variant and more recently Russia’s invasion of Ukraine have dragged markets lower.
For example, shares of fintech company Toast (NYSE: TOST) went public last September at $40. Toast stock price touched a record high of $69.9 in November before falling to $20 this week.
Let’s see if this beaten-down tech stock should be part of your portfolio right now.
An overview of Toast
Valued at a market cap of $10 billion, Toast operates a cloud-based technology platform for the restaurant industry in the U.S. and Ireland. Its hardware product is Toast Point of Sale while Toast Order & Pay allows customers to order and make payments from mobile devices. The company also offers Toast Flex for on-counter and pay which can be used as a server station, kitchen display system, guest kiosk, or an order fulfillment station.
Toast increased sales from $665 million in 2019 to $1.7 billion in 2021. While still unprofitable, its operating loss accounted for 13.4% of sales, compared to 32% of sales in 2019.
Recent quarterly results
In Q4 of 2021, Toast reported revenue of $512 million, compared to estimates of $487.6 million. However, its adjusted loss per share stood at $0.23, compared to estimates of a loss of $0.12 per share. Toast’s average recurring revenue or ARR rose 74% to $568 million while it ended Q4 with a gross payments volume of $17 billion, an increase of 125% year over year.
Company CEO Chris Comparato explained, “The restaurant industry was tested again in 2021, but as evidenced by our growth there is tremendous demand for the Toast platform as restaurant operators navigate the new normal. We had a record quarter and year as a result of strong focus on our customers and consistent execution. Restaurants of all sizes run their business on Toast and we are committed to being the trusted platform of choice for the restaurant industry.”
In Q1 of 2022, Toast forecast sales between $469 million and $499 million above consensus estimates of $463 million. Its revenue forecast for 2022 was between $2.349 billion and $2.409 billion compared to estimates of $2.28 billion. However, Toast is expected to remain unprofitable with an EBITDA loss between $65 million and $55 million in Q1 of 2022 and between $240 million and $200 million in 2022.
Toast stock price might move higher in 2022
The restaurant sector was among the worst hit during the pandemic but Toast managed to grow its top-line at a robust pace. It ended 2021 with 57,000 live locations, up from 40,000 locations in 2020, indicating an increase of 41% year over year. Its widening customer community also accelerated the adoption of the Toast platform as the percentage of customers using four or more core modules rose from 48% in 2020 to 59% in 2021.
Its software-as-a-service average revenue per user rose 30% in Q4 while its net retention rate stood at a healthy 135%, which suggests customers increased spending on the Toast platform by 35% last year.
Toast explained that the operating environment was quite challenging for restaurant operators in 2021 as they were impacted by shifting workforce dynamics, a labor shortage, and rising input prices due to supply chain disruptions. But Toast’s suite of products and services allowed customers to navigate uncertainties and same-store sales of restaurants rose by 6% compared to Q4 of 2019.
Given Toast’s revenue forecast, the stock is valued at a forward price to sales multiple of 4.3 which is quite reasonable considering its growth profile. Analysts tracking Toast stock expect its prices to touch $34 which is 70% above the current trading price.