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Dropping by 42%, this Growth Stock is Currently a Potential Purchase Opportunity

The significant industry is currently experiencing disruption.

Decrease in Growth Company's Shares by 42%, Consider Buying at Present Moment
Decrease in Growth Company's Shares by 42%, Consider Buying at Present Moment

Dropping by 42%, this Growth Stock is Currently a Potential Purchase Opportunity

Toast, short for TOST (-1.43%), isn't a household name in consumer circles, despite potentially interacting with its platform.

If you're a growth investor, however, Toast is worth familiarizing yourself with. It's an innovative, disruptive company with a catchy name and a popular product, catching the attention of money managers such as Cathie Wood. Toast's stock saw a significant surge following its impressive third-quarter earnings report, but it's still 42% below its all-time highs. Here's why it's worth investigating.

The talk of the restaurant world

Toast offers a connected, digital platform for the restaurant industry. Its range of hardware and software solutions enhance restaurant management, functioning as a comprehensive solution that integrates payroll, inventory, menus, accounts payable, mobile ordering, and more. Restaurants using Toast's services have reported a 90% reduction in payroll hours and a 15% increase in orders under 10 minutes. This is undoubtedly appealing to restaurants and has contributed to its rapid growth.

In the third quarter, Toast added 7,000 new locations, bringing the total to 127,000. This represented a 28% year-over-year increase. Furthermore, its preferred top-line metric, Annualized Recurring Run-rate, rose 28% year-over-year to $1.6 billion.

Those figures demonstrate Toast's impressive growth trajectory, but the standout aspect of its third-quarter report was profitability. Operating income improved from a $59 million loss last year to a positive $34 million this year, while a $31 million net loss in 2021 turned into a positive $56 million this year. This surpassed Wall Street expectations for earnings per share (EPS) of $0.01, with an actual EPS of $0.07.

A vast opportunity

Toast currently holds approximately 14% of the market, and it's a sizable market. The restaurant industry yields $1 trillion in annual sales and represents 4% of the country's GDP. The remaining 87% of the market is primarily comprised of establishments still using legacy systems and have yet to transition to the cloud.

Toast's objective isn't to seize market share from its competitors offering similar benefits; there are certainly competitors, but its primary objective is to help establishments relocate from outdated systems to its cloud-based, interconnected ecosystem. This natural progression will result in benefits for Toast in light of its top-notch platform and dominant market position.

Moreover, Toast is expanding its offerings, introducing features and solutions tailored to diverse clients. It presently has custom interfaces for various types of eateries, including bakeries, pizza shops, and fine dining, and is now targeting the grocery market through a product called Toast Food & Beverage Retail. This opens up an entirely new segment, offering fresh growth opportunities.

Toast is also venturing into international markets, serving as a further catalyst for growth in the years ahead.

Challenges and valuation

Toast's biggest challenges lie in profitability and competition. Investors require additional profitable quarters to confirm Toast's ability to operate profitably, but this is a promising start. It's mastering efficiency and harnessing its digital, asset-light platform to expand. Regarding competition, its growth is impressive, as it holds its ground against competitors such as Block's Square seller's business. However, Toast is a young, expanding entity, and these are factors to keep an eye on.

Another vital consideration is Toast's valuation. Toast's stock rose 18% after the remarkable earnings report, trading at a forward one-year P/E ratio of 45. This may be high, but it's not unheard of for a growth stock. Toast's stock commands a premium due to its strong performance and profitability.

The long-term potential is enticing, and Toast stock seems like a solid investment at this price, provided you're comfortable with the risk.

Investors interested in growth opportunities in the finance sector might consider looking into Toast, given its impressive growth and potential in the $1 trillion restaurant industry. With its innovative platform and expanding offerings, Toast aims to help establishments transition from outdated systems to its cloud-based ecosystem, which could lead to further benefits for the company.

Growth investors should also take note of Toast's recent financial performance, as it reported a significant surge in earnings and impressive growth metrics, including a 28% year-over-year increase in its Annualized Recurring Run-rate. These strong financial indicators, coupled with its dominant market position and potential for further expansion, make Toast a promising investment option for those willing to take on the associated risks.

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