Don’t Get Burnt with Toast Stock as Profitability Remains Elusive

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Boston-based food-service software platform Toast (NYSE:TOST) made its debut for public trading not long ago, to much anticipation. At first, folks who bought TOST stock enjoyed fast gains. However, the euphoria would soon wear off.

A close-up of a Toast (TOST) ordering screen.
Source: TonelsonProductions / Shutterstock.com

This shouldn’t be too surprising in a time when retail investors are constantly looking for the next shiny object in the markets. Loyalty is a rare commodity on Wall Street, it seems, as traders’ attention spans have only gotten shorter lately.

Now that the company’s novelty has worn off, Toast will have to prove its value proposition and bring investors back into the fold. The question remains: can a restaurant-focused payment-software business get its mojo back?

It’s possible, as Toast is ambitiously focused on a very specific and potentially lucrative niche market. Still, a glance at the company’s bottom-line stats should give prospective investors some food for thought, and might leave a bad taste in their mouths.

A Closer Look at TOST Stock

Let’s start this story off at the beginning, which really wasn’t very long ago. On Sept. 21, 2021, Toast established an initial public offering (IPO) price of $40. Previously, the expected price range had been $34 to $36.

The next day, TOST stock catapulted 56% in its first day of trading on the New York Stock Exchange, closing at $62.51.

That warm-and-toasty feeling didn’t last long, however. Starting in November, the stock embarked on a relentless slide and eventually lost more than half of its value.

Fast-forward to mid-February 2022, and TOST stock was trading at $27 and change.

It’s too early in the game to identify technical support and resistance levels. Nevertheless, $30 will likely be a battle zone in the coming weeks. Continued volatility should be expected, furthermore, as the process of price discovery could take a while.

Counting on a Restaurant Renaissance

Admittedly, the recent price action of TOST stock isn’t particularly encouraging. Instead of technical considerations, then, prospective investors might draw inspiration from Toast’s vision and mission.

Apparently, Toast is seeking to provide an end-to-end, software as a service (SaaS) platform for restaurants of all sizes. This software addresses a range of needs, from point of sale and operations, to digital ordering and delivery, marketing/loyalty and team management.

In all likelihood, much of the anticipation surrounding Toast’s IPO was based on the hope of a post-Covid-19 restaurant-industry resurgence. The emergence of the omicron variant strain in late 2021 may have put a damper on those high hopes, however.

Nonetheless, some investors will remain optimistic, and not without justification. As Toast points out, the company is targeting a “massive” total addressable market valued at $110 billion globally, and $55 billion.

Besides, Toast makes restaurant-business management much more efficient through its full suite of tech tools. Heck, Toast will even provide crucial data insights covering food preparation time, shift productivity, ratings/reviews and more.

Thus, after perusing the company’s press materials, investors might get the impression that Toast is a restaurant-market SaaS powerhouse.

Big Revenue, Bigger Loss

Let’s cool our jets for a moment, though. As a habit, investors should investigate a company’s financials before jumping into the trade.

In terms of top-line results, there’s really nothing to complain about. Reportedly, Toast grew its revenue from $580.6 million during 2020’s first nine months, to $1.19 billion during 2021’s first nine months.

That’s impressive, but it doesn’t paint the full fiscal picture. In that same time frame, Toast’s net earnings loss ballooned from $187.16 million to $487.15 million.

How did Toast manage to incur a $487.15 million net loss while generating $1.19 billion in revenue? That’s a valid question, and it raises the issue of cost-cutting (or the lack thereof).

The list of Toast’s expenditures is lengthy, but the most glaring item is “financial technology solutions.” Somehow, the company managed to outlay $779.1 million on this category.

Financial-technology-solutions costs, according to the company, “primarily consist of transaction-based costs, which are primarily fees and costs paid to issuers and card networks as well as other related fees associated with third-party payment processors and fraud management.”

The Bottom Line

Unless Toast finds ways to reduce its expenditures overall, and particularly on “financial technology solutions,” recommending an investment in the company is going to be difficult.

This isn’t to suggest that Toast doesn’t have excellent potential as a business venture. Clearly, the company is capable of generating robust revenue.

For the time being, it would be wise to keep Toast on your watch list and check for upcoming financial data. If the company can steer toward a profitable profile, traders might be able to make the most of Toast.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Motley Fool, Crush the Street, Market Realist, TalkMarkets, TipRanks, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.


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