Investing In R&D And AI Will Open New Markets

Key Takeaways

• Expanding into new segments and geographies is set to drive location growth and revenue expansion.
  
• Strategic investments and cost optimizations in fintech aim to improve gross margins and future profitability.
  
• Heavy reliance on the U.S. restaurant market and ambitious investments pose risks to revenue, profitability, and investor expectations amid economic and regulatory challenges.

Catalysts

Operates a cloud-based digital technology platform for the restaurant industry in the United States, Ireland, India, and internationally.

• Toast is expanding its addressable market by entering new customer segments and geographies, which is expected to drive significant location growth and revenue expansion.
  
• The company is investing in R&D and market capacity to enhance customer satisfaction and increase market share in enterprise, international, and retail segments, expected to drive future revenue growth.
  
• By focusing on increasing customer adoption of its platform through data and AI, Toast aims to improve top-line revenue via higher ARPU and attach rates.
  
• Toast is continuing to make strategic investments while expanding its margins, which should positively impact net margins and future profitability.
  
• The targeted pricing adjustments and ongoing cost optimization in their fintech solutions act as a catalyst for sustainable increases in gross margins and earnings.

Toast Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Toast's revenue will grow by 20.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.4% today to 7.2% in 3 years time.
• Analysts expect earnings to reach $617.2 million (and earnings per share of $1.06) by about May 2028, up from $19.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $760 million in earnings, and the most bearish expecting $464 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 51.8x on those 2028 earnings, down from 1095.8x today. This future PE is greater than the current PE for the US Diversified Financial industry at 14.2x.
• Analysts expect the number of shares outstanding to grow by 3.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.82%, as per the Simply Wall St company report.

Toast Future Earnings Per Share Growth

Risks

• The heavy reliance on its core U.S. restaurant market means any economic downturns or disruptions in this sector could negatively affect Toast's revenue and earnings.
  
• Expansion into new markets and verticals involves significant investment; failure to generate expected returns could impact profitability and net margins.
  
• The ambitious market scaling and investment strategy may stretch the company's resources and lead to inefficiencies, potentially affecting overall margins.
  
• Increased focus on international markets, while offering growth potential, carries risks related to adapting to diverse regulatory environments and capital outlay, impacting revenue growth.
  
• Toast's strategy to gradually expand margins while investing heavily in new areas could mean slower near-term profitability, impacting investor expectations concerning earnings growth.

Valuation

• The analysts have a consensus price target of $41.033 for Toast based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $50.0, and the most bearish reporting a price target of just $26.4.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.6 billion, earnings will come to $617.2 million, and it would be trading on a PE ratio of 51.8x, assuming you use a discount rate of 6.8%.
• Given the current share price of $36.21, the analyst price target of $41.03 is 11.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.