Restaurant management software specialist Toast (NYSE:TOST) — which provides software and hardware solutions to help restaurants streamline their operations and improve guest experiences — saw its market value pop on Wednesday. Earlier, Redburn Atlantic upgraded its assessment of the company, citing “underappreciated pricing power.” Additionally, restaurant sector sales point to possibly improving conditions in the industry, contributing to bullishness in TOST stock.
According to a Seeking Alpha report, Redburn’s Dominic Ball upgraded shares to “buy” from “neutral.” Thanks to the combination of Toast’s steady-to-improving gross payment take rate and onboarding of larger merchants, these attributes point to the company’s ability to raise prices on small business merchants.
“This history of underappreciated price hikes, coupled with management signalling software price increases, means we forecast net revenue upgrades of between 5% to 10% from 2024 to 2026,” remarked Ball in a research note to clients.
Additionally, the analyst pointed to Toast’s “enhanced operating leverage and ability to sustain elevated revenue growth.”
For stakeholders of TOST stock, it’s a welcome change of narrative. Last July, shares stumbled badly after the company reversed its controversial 99-cent online order processing fee. While management acknowledged its customers’ anger, it also forced analysts to reassess forward business implications.
TOST Stock Could Potentially Benefit from Improving Conditions
Although TOST stock is now off to a more auspicious start in 2024 — gaining over 5% since the beginning of January — it’s still down about 20% in the trailing 52 weeks. Conspicuously on paper, the underlying company still hasn’t recovered from the order processing fee controversy. However, it’s difficult to determine whether it was that decision alone that contributed to the decline.
In recent years, consumers have struggled to manage the burden of high inflation as well as rising interest rates. Glaringly, the personal saving rate popped to a peak of 5.3% last year in May. In December 2022, this metric landed at only 3.4%. Further, it declined from an all-time recorded high of 32% in April 2020 to 2.7% in 2022.
Given that Toast aligns with the broader discretionary retail ecosystem, more people saving their money doesn’t help matters for TOST stock. However, some evidence points to improving conditions.
Historically, retail sales in the restaurants and other eating places sector generally see a decline in revenue from summer through winter (though December usually sees a pop higher). From there, sales rise back through the summer, repeating the cycle.
In the period between July 2022 and November 2022, restaurant revenues declined about 9.2%. However, in the same comparison for last year, sales declined about 8.1%. That could be a sign that customers have started to adjust to post-pandemic realities and are opening their wallets more.
Why It Matters
With Redburn Atlantic’s upgrade, the view aligns with the consensus rating for TOST stock of moderate buy. This assessment breaks down as eight buys, six holds and one sell. Overall, the average price target lands at $20.50, implying 8% upside potential.
On the date of publication, Josh Enomoto 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.
