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The financial landscape has seen a remarkable turnaround in 2024, with investors displaying increased confidence, leading to notable stock performance spikes. One company garnering attention is Toast (TOST -0.07%), whose shares have experienced an impressive rise of 134% as of November 22. This prompts the question: Is now the right time to invest in this rapidly growing stock?
The Growth Narrative
Toast has carved out a niche for itself by focusing specifically on the unique requirements of the restaurant sector. The firm offers an integrated range of hardware, software, and financial solutions aimed at streamlining restaurant operations.
Growth is integral to Toast’s trajectory. In the first three quarters of 2024, the company achieved total revenues of $3.6 billion, representing a 28% increase from the same timeframe in 2023. Analysts on Wall Street predict that Toast’s revenue will rise at a compound annual growth rate of 22% from 2024 through 2026.
The company’s success hinges on acquiring new customers, which translates into higher sales. Following the addition of 7,000 new restaurant customers in the past quarter, Toast now serves 127,000 locations across the U.S. This translates to a market share exceeding 14% domestically, with significant room for expansion internationally, where it currently holds less than 1% of the market.
Notably, unlike many fast-growing startups, Toast is already reporting profits. In Q3, the company recorded $56 million in net income, a substantial turnaround from a $31 million loss during the same quarter last year. Consistent profitability will be crucial for Toast to demonstrate that it has a scalable and sustainable business model as it continues its growth trajectory.
Building a Competitive Advantage
Long-term investors often look for companies that possess a competitive edge or an “economic moat.” This advantage enables a company to outperform its competition and resist market entrants. An economic moat is vital for ensuring a company’s longevity and resilience.
Founded approximately 13 years ago, Toast is still in its early stages but appears to benefit from significant switching costs. While management hasn’t disclosed customer churn rates, it is reasonable to deduce that clients engaged with multiple features of Toast’s platform may experience challenges when considering a switch to alternatives. As long as Toast continues to provide valuable services that are essential to its restaurant clients, it stands to maintain its customer base effectively. The fact that 75% of new customers are acquired through inbound marketing and 20% via referrals speaks to the company’s positive market presence.
Analyzing Toast’s Valuation
Despite the surge in Toast’s stock price—more than 130% this year—the shares are still 34% below their historic high reached at the close of the bull market in 2021.
Potential investors should be aware that purchasing shares means accepting a price-to-sales ratio of 5.2. This is considerably higher than earlier in the year, reflecting the market’s increasing optimism surrounding Toast’s future. At this valuation, the margin of safety appears limited.
For investors prioritizing growth over valuation, Toast may seem like a desirable acquisition. However, those who are more focused on value might find it prudent to bypass this stock at its current price point.
Source
www.fool.com