What Happened?
A number of stocks jumped in the afternoon session after the Software as a Service (SaaS) sector rebounded following the sell-off in the previous trading session as a weaker-than-expected U.S. jobs report increased the probability of a Federal Reserve interest rate cut. The July Nonfarm Payrolls (NFP) report showed the U.S. economy added only 73,000 jobs, significantly below the 110,000 forecast. This, combined with downward revisions for May and June, signaled a cooling labor market to investors. In response, market expectations for a September interest rate cut by the Federal Reserve surged from roughly 40% to over 80%. A potential rate cut is generally favorable for growth sectors like technology and SaaS, as lower rates can increase the present value of their future earnings, boosting stock valuations.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks.
Among others, the following stocks were impacted:
- Content Delivery company F5 (NASDAQ: FFIV) jumped 4.6%. Is now the time to buy F5? Access our full analysis report here, it’s free.
- Data Storage company DigitalOcean (NYSE: DOCN) jumped 4.3%. Is now the time to buy DigitalOcean? Access our full analysis report here, it’s free.
- Advertising Software company AppLovin (NASDAQ: APP) jumped 3.2%. Is now the time to buy AppLovin? Access our full analysis report here, it’s free.
- Hospitality & Restaurant Software company Toast (NYSE: TOST) jumped 5.1%. Is now the time to buy Toast? Access our full analysis report here, it’s free.
- Payments Software company Flywire (NASDAQ: FLYW) jumped 4.2%. Is now the time to buy Flywire? Access our full analysis report here, it’s free.
Zooming In On Toast (TOST)
Toast’s shares are quite volatile and have had 16 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was 9 months ago when the stock gained 22.8% on the news that the company reported strong third-quarter earnings and provided an optimistic EBITDA forecast for the next quarter, which blew past analysts' expectations. While sales were in line with Wall Street's expectations, EPS and EBITDA beat more convincingly during the quarter. Sales growth was driven by an increase in the number of operational locations and higher SaaS revenue. This growth was further supported by the introduction of new product offerings, such as SMS marketing and branded apps, which effectively boosted customer engagement. Despite some pressure on annual recurring revenue (ARR), the company maintained momentum in expanding its addressable market, notably in the international and retail segments, setting the stage for sustained long-term growth. Zooming out, we think this was a good quarter with some key areas of upside.
Toast is up 35.3% since the beginning of the year, and at $49.22 per share, has set a new 52-week high. Investors who bought $1,000 worth of Toast’s shares at the IPO in September 2021 would now be looking at an investment worth $787.53.
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