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1 Growth Stock Dropped 59% to Buy Right Now
If you look hard enough, you can still find quality companies to buy from. Gift (NYSE: TOST), in particular, just released financial results that the market applauded, with shares rising 13% immediately following the announcement.
If we dig a little deeper, there is a lot to like about this company and the direction it is heading, although the growth stock fell 58% from its all-time high. Here’s why it’s still a smart buy right now.
Penetrating a huge industry
At a high level, Toast meets the specific needs of restaurants. This means providing hardware and software solutions to handle processes like payment processing, omnichannel ordering, loyalty programs, employee payroll, and accounting. Toast is essentially a leading provider of operating systems for owners and operators, with the goal of making running a restaurant as simple as possible.
The good news is that the opportunity for Toast is truly huge. There are 860,000 restaurants in total in the US, of which 112,000 are already customers of the business. That number increased 32% year over year. If the business manages to make considerable progress in international markets, then the expansion path will be even greater, as there are 22 million restaurants worldwide.
Revenue increased 31% in the first quarter to $1.1 billion. This was better than Wall Street consensus analysts’ expectations. Just three years ago, Toast reported sales of $282 million in the first quarter of 2021, so it’s clear the company is making a comeback in restaurants.
The management’s objective is to generate greater recurring revenue, such as subscriptions and payments, to add more stability and predictability to operations. On an annualized basis, this segment grossed US$1.3 billion in sales, 32% above the first quarter of 2023.
Get to the end result
Toast’s growth is simply impressive, especially when considering the uncertain economic environment we find ourselves in. However, the business leaves a lot to be desired when it comes to bottom line performance. Last quarter, Toast reported a net loss of $83 million, roughly in line with the same period a year ago.
I’m typically skeptical of companies that don’t generate consistent profits. In my opinion, this adds a lot of risk for investors because it shows that the business model has not yet proven itself. Furthermore, it is always difficult to say exactly when a positive net profit will be achieved.
However, I’m willing to give Toast the benefit of the doubt. The reason is that the company is developing a economic gap This stems from the fact that your customers have high switching costs.
The story continues
Put yourself in the shoes of a restaurant owner. You, your team, and your customers are fully aware of Toast’s offerings. Things are going well and there have been no problems.
In this scenario, you probably won’t switch to a rival’s products and services, even if they are cheaper. Imagine the complicated process of leaving Toast while integrating a new system. This seems like a tall order.
This gives me confidence that Toast has staying power, especially as its customer base remains somewhat locked down. Consequently, as revenues continue to increase at a rapid rate, the hope is that the business can eventually start generating outsized profits.
Many advantages
The market is not asking investors to pay for Toast. Shares trade at a price-to-sales ratio of 3.5, well below the historical average multiple of 4.7.
Given the moat I just discussed, along with a huge growth opportunity, Toast stock appears to have a lot of upside for long-term investors.
Should you invest $1,000 in Toast now?
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Neil Patel and its clients do not have a position in any of the stocks mentioned. The Motley Fool has positions and recommends Toast. The Motley Fool has a disclosure policy.
1 Growth Stock Dropped 59% to Buy Right Now was originally published by The Motley Fool