AI And New Segments Will Shape Long-Term Restaurant Platform Trajectory

Catalysts

About Toast

Toast provides a cloud-based, end to end restaurant and food service management and payments platform.

What are the underlying business or industry changes driving this perspective?

• Although Toast is extending its footprint from 156,000 locations toward a potential 500,000, saturation risk in core U.S. restaurants and intensifying competition could slow net new location growth and cap long term revenue expansion.
• Despite rapid adoption of AI driven tools like Toast IQ and Advertising, rising AI infrastructure costs and potential limits on monetization may erode the contribution margin from software and constrain future net margin improvement.
• While digital ordering, delivery and off premise channels are growing structurally, reliance on partners such as Uber and large aggregators could compress take rates over time and limit upside to payments revenue and fintech gross profit.
• Although international, retail food and enterprise segments are scaling toward $100 million in ARR, higher sales and deployment complexity, localization requirements and slower adoption curves could delay their path to $1 billion ARR and weigh on overall earnings growth.
• While card based restaurant spending has historically been resilient across cycles, a prolonged consumer slowdown or shift in dining mix toward lower ticket, value formats could pressure GPV per location and temper both revenue growth and adjusted EBITDA expansion.

Assumptions

This narrative explores a more pessimistic perspective on Toast compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Toast's revenue will grow by 17.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.7% today to 6.0% in 3 years time.
• The bearish analysts expect earnings to reach $574.5 million (and earnings per share of $1.0) by about December 2028, up from $273.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $1.2 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 48.7x on those 2028 earnings, down from 76.2x today. This future PE is greater than the current PE for the US Diversified Financial industry at 13.6x.
• The bearish analysts expect the number of shares outstanding to grow by 2.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.32%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is compounding at scale with 30% ARR growth, recurring gross profit growing over 30% and a clear ambition to reach $5 billion to $10 billion in ARR. Sustained high growth in revenue and gross profit could drive multiple expansion and a meaningfully higher share price over time.
• Core U.S. SMB operations already operate at a 40% EBITDA margin with incremental margins tracking higher, while adjusted EBITDA margins have reached 35% and free cash flow conversion is near 100%. Continued margin expansion and cash generation could support a higher valuation through stronger earnings and free cash flow.
• Expansion into international, food and beverage retail and enterprise segments is scaling rapidly toward $100 million in ARR, with management explicitly targeting $1 billion ARR in each over time. Successful execution in these new TAMs could structurally accelerate long-term revenue growth and earnings beyond current expectations.
• AI-driven products such as Toast IQ and Toast Advertising are already seeing strong adoption and measurable sales uplift for customers. This could increase ARPU, improve take rates and deepen platform stickiness, thereby boosting long-term revenue and net margins.
• Rising total and payments take rates driven by targeted pricing actions, cost optimization and fintech products like Toast Capital show clear pricing power and operating leverage in the payments engine. This could further enhance gross profit growth and support higher earnings than the current share price implies.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Toast is $36.0, which represents up to two standard deviations below the consensus price target of $47.42. This valuation is based on what can be assumed as the expectations of Toast's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $65.0, and the most bearish reporting a price target of just $36.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $9.5 billion, earnings will come to $574.5 million, and it would be trading on a PE ratio of 48.7x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $35.4, the analyst price target of $36.0 is 1.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.