This Super Growth Stock Is Down 74%: Is It Time to Buy?

Toast (TOST 1.90%) had its initial public offering (IPO) during the bull market in late 2021. Since then, however, the market hasn’t been kind to the company’s investors.

As of this writing, shares of this restaurant-focused software-as-a-service (SaaS) business are down 74% from their all-time high, which was set in November 2021. It’s a similar story for other beaten-down growth tech companies.

Does this mean now is the right time to buy Toast stock? Here’s why that might be a smart move.

Lots of growth potential

As is the case with many SaaS companies, Toast has experienced rapid growth. Revenue went from $665 million in 2019 to $3.6 billion in the latest trailing-12-month period. And despite unfavorable macroeconomic factors that have created headwinds for many companies, Toast was able to register a 44% rise in sales through the first nine months of 2023. The momentum is still strong.

Credit goes to the management team identifying an area of the restaurant industry that was being largely ignored by existing service providers. Toast provides various tools, ranging from point-of-sale hardware and digital ordering capabilities to payment processing and payroll management, that support the smooth operation of restaurants.

Toast’s rapid expansion indicates that the business is solving a much-needed problem. And this is that the current restaurant back-office infrastructure is outdated and in need of a major update. Toast’s focus on providing a superior user experience is key.

Although the restaurant industry itself is extremely mature with limited growth potential, Toast’s long-term prospects are bright. In the U.S., there are 860,000 restaurants, of which nearly 12% are already Toast customers. But this demonstrates the huge opportunity for the company.

This doesn’t include international markets. There are 22 million restaurants globally that will spend $110 billion on technology. Toast has a long expansionary runway ahead of it.

Presence of a moat

It’s a smart idea to invest in businesses that have an economic moat. This is a single trait, or a combination of characteristics, that allows a company to defend itself against existing rivals and new entrants in the industry. For long-term investors, an economic moat is critical because it raises the chance that a particular business will thrive well into the future.

For a company that’s still early in its life cycle, it’s encouraging to see that Toast does indeed have an economic moat thanks to a phenomenon known as switching costs. Consider things from the perspective of a restaurant: Once the manager and the employees have become familiar with the software and services that Toast sells, there’s some stickiness. It would be a considerable burden to change to a different company’s offerings, risking operational disruptions.

Toast generated $1.2 billion of annualized recurring revenue in the latest quarter from subscriptions and payments, up 40% from the year-ago period. It is management’s goal to continue increasing this figure, which shows how locked in customers are. Greater recurring sales add stability and predictability to the business.

Narrowing net losses

It’s typically a smart idea to only buy shares in companies that are consistently profitable. Producing positive net income is a clear sign that a business has achieved a financial milestone and is on a sustainable path. By not needing to rely on external funding sources, financial risk is mitigated.

Toast currently isn’t profitable, but there are signs of improvement. The Q3 net loss of $31 million was less than one-third the deficit in the year-ago period. Operating expenses only rose 21%, much lower than revenue growth, so there might be some benefits as the company scales up.

It’s anyone’s guess when, or if, Toast will start reporting positive net income. But the trends are encouraging.

Investors comfortable taking on some risk should consider adding Toast to their portfolios.