Restaurant technology platform Toast (NYSE: TOST) went public via IPO on Wednesday, September 22. The seven-year-old company listed at $40 a share, giving it a $20bn valuation. Retail interest vigorously bought in, and Toast ended the day trading above $60, thus achieving a $30bn market cap.
Goldman Sachs (NYSE: GS) led Boston’s biggest-ever IPO, transforming its three co-founders into instant billionaires. After Covid-19 dealt a make-or-break blow to the company, it has made a sensational comeback. Indeed, Toast demonstrates an astonishing turnaround story that perfectly illustrates the resilience and complex reality of the past eighteen months.
What is Toast?
Toast is a technology company making software for the restaurant industry. It has 29k customers, and its technology is deployed in 48k locations. Founded in Boston, Massachusetts, Toast was founded by three former colleagues in 2012.
Steve Fredette, Aman Narang, and Jonathan Grimm previously worked together at Endeca, which Oracle (NYSE: ORCL) acquired for over $1bn in 2011.
The restaurant, bar, and café industry is hugely competitive, and margins are low. This made it a huge challenge to break into. Undeterred, the team forged ahead, building its entire system, combining hardware and software to help restaurants manage their operations.
Toast opted to build out its platform on the Android platform rather than Apple, giving it the freedom to evolve with customer needs and desires.
The company now offers its clients a point-of-sale terminal, handheld devices for waitstaff, and mobile ordering and payment software for consumers.
How does Toast make money?
Toast has four main revenue streams but is not yet profitable. It operates as a payment processor like Square (NYSE: SQ) and makes money from subscriptions. It also generates revenue from hardware and professional services.
Its revenue grew 24% year-over-year from $665m in 2019 to $823m in 2020.
During the six months ended June 30, 2020, it incurred net losses of $125m. While during the same period, in 2021, losses widened to $235m. Sales and marketing expenses increased 2% during this time.
40% of its income currently comes from the 2.69% fee it takes from processing payments.
The Toast team has been steadily building relationships with restaurants and keeping customers happy.
The key areas restaurants want to improve are raising revenues, streamlining operations, and ensuring happy customers lead to repeat business. Toast is helping restaurants improve in all three areas, thus helping to scale its own business.
Toast also aims to increase restaurant profit margins and improve employee retention.
When the pandemic hit, Toast went into survival mode and terminated or furloughed more than half its staff. As lockdowns became commonplace and eating in became the new eating out, demand for Toasts services surged, and it suddenly saw its fortunes reversed.
Indeed, its popularity has soared due to its ease of use and seamless customer experience.
Is Toast an exciting investment opportunity?
The IPO market is still hot, and investor interest does not appear to be slowing. But the broader capital markets are on shaky ground, making analysts nervous about the sustainability of speculative businesses.
It seems Toast has benefitted from the pandemic surge in-home deliveries, and how sustainable that market is remains to be seen.
Payment processing is very competitive, with much bigger players for Toast to compete against. While it displays growth with an accumulation of smaller customers, it will have a more challenging time picking up contracts with the more prominent industry players because many simply opt to build their own tech solutions.
For instance, eatertainment chain Dave and Buster’s Entertainment (NASDAQ: PLAY) has recently developed its own mobile payment platform. Other point of sale providers such as Square, TouchBistro, and Aloha also compete in the same addressable market.
Toast may well continue to snap up market share and grow with its valuation. Indeed growth is key to its continued success. But at this point, it seems highly speculative. Many risks are facing the business, including Covid-19, semiconductor shortages, supply-chain issues, and rising competition, to name a few. Time will tell whether growth in the restaurant industry is sustainable.
