Restaurant Technology Adoption Will Drive Massive Long Term Upside

Catalysts

About Toast

Toast provides an all-in-one, cloud-based technology platform that powers restaurants and food and beverage retailers across sizes and formats.

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

• Accelerating adoption of modern, cloud-based restaurant technology, where Toast already leads U.S. SMB and mid-market win rates, positions the company to increase its share of locations and GPV over time, which in turn drives ARR and payments revenue growth.
• Expansion into international markets, enterprise customers and food and beverage retail, all leveraging the same core platform, enables Toast to scale from 156,000 to potentially 500,000 locations, supporting a path from $2 billion to $5 billion and $10 billion in ARR with rising absolute earnings.
• Rapid uptake of AI-driven products such as Toast IQ and Toast Advertising, with tens of thousands of early users, is expected to lift ARPU and same-store sales for customers, supporting higher SaaS and fintech revenue while improving net margins through software leverage.
• A structural shift toward digital ordering, off-premise consumption and integrated delivery partnerships, including Uber and Amex ecosystem integrations, deepens Toast’s role in guest demand generation, increasing GPV throughput and fintech gross profit over time.
• A demonstrated ability to expand take rate through cost optimization, targeted pricing and new fintech offerings such as surcharging and Toast Capital, combined with a core business already at roughly 40 percent EBITDA margin, provides a potential path to growing net margins and free cash flow faster than revenue.

Assumptions

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

• The bullish analysts are assuming Toast's revenue will grow by 21.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 4.7% today to 11.7% in 3 years time.
• The bullish analysts expect earnings to reach $1.2 billion (and earnings per share of $2.24) by about December 2028, up from $273.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $580.3 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 38.7x on those 2028 earnings, down from 78.6x today. This future PE is greater than the current PE for the US Diversified Financial industry at 13.9x.
• The bullish 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 7.33%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The strategy to aggressively expand into multiple new TAMs such as international, enterprise and food and beverage retail requires sustained elevated sales and marketing and hardware subsidy spend. If these newer segments fail to reach scale or prove less profitable than the core U.S. SMB business, long-term operating leverage could stall and EBITDA margins may plateau or decline, pressuring earnings growth.
• Toast’s model is increasingly dependent on payments volume and take rate expansion. Any long-term normalization in same-store sales growth, a weaker consumer spending environment or competitive pricing pressure on transaction fees and surcharging could reduce GPV growth and limit future increases in net take rate, weighing on fintech revenue and gross profit.
• The narrative assumes durable competitive advantage from Toast IQ, Toast Advertising and other AI-driven tools. If rivals replicate or surpass these capabilities, or if customers are slow to adopt or to pay more for them, the expected uplift in ARPU and upsell-driven SaaS growth may not materialize, constraining subscription revenue and delaying margin expansion from software leverage.
• Scaling Toast Capital and other nonpayments fintech products introduces long-term credit and underwriting risk. If defaults rise above management’s current expectations through a downturn or structural shift in restaurant economics, higher bad debt and credit-related costs could erode fintech gross profit and compress net margins and free cash flow.
• The company’s ambition to more than triple locations from 156,000 to 500,000 and beyond assumes a long runway of restaurant digitization. Saturation in core U.S. markets, rising competitive intensity, or slower than expected adoption in international geographies could reduce net location adds over time, lowering ARR growth and undermining forecasts for sustained revenue and earnings compounding.

Valuation

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

• The assumed bullish price target for Toast is $60.85, which represents up to two standard deviations above 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 bullish 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 bullish analyst cohort, you'd need to believe that by 2028, revenues will be $10.5 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 38.7x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $36.49, the analyst price target of $60.85 is 40.0% 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.