Toast Inc. (TOST) is an all-in-one cloud-based digital technology platform designed for restaurants of all sizes. It provides a unified platform of software as a service products and financial technology solutions that provide restaurants with everything they need to run their business, including point of sale, digital ordering and delivery, marketing, and staff management.
The stock is down 46.4% year-to-date and 13.9% over the past month, closing Friday's trading session at $18.63. Despite reporting a net income of $2 million in the last quarter, the firm fell short of market expectations. The company emphasized many industry-wide issues that restaurant owners faced, such as shifting worker demographics, a prolonged labor shortage, and rising input prices owing to supply chain disruptions.
Here's what could shape TOST's performance in the near term:
Inadequate Financial Performance
TOST's revenue rose 110.7% year-over-year to $512 million for the fourth quarter, which ended Dec. 31, 2021. Its operating expenses grew 81.7% from its year-ago value to $189 million. Its operating loss surged 103.5% from the previous-year quarter to $116 million. And the company's loss per share came in at $0.23. In addition, its net cash used in operating activities amounted to $32 million, representing a 14.3% increase over this period.
Stretched Valuation
In terms of forward Price/Book, the stock is currently trading at 12.24x, 194% higher than the industry average of 4.16x. Also, its trailing-12-months EV/Sales of 3.51x is 18.3% higher than the industry average of 2.97x. Moreover, TOST's trailing-12-months Price/Sales of 4x is 31.5% higher than the industry average of 3.04x.
Poor Profitability
TOST's trailing-12-months gross profit margin of 18.7% is 63.1% lower than the industry average of 50.6%. Its trailing-12-months cash from operations of $2 million was 97.8% lower than the industry average of $90.61 million. Also, its trailing-12-months ROA, net income, and ROC are negative 28.1%, 28.6%, and 15.9%, respectively.
POWR Ratings Reflect Bleak Outlook
TOST has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. TOST has a D grade for Value. The company's higher than industry valuation is consistent with the Value grade.
Of the 60 stocks in the D-rated Software – Business industry, TOST is ranked #50.
Beyond what I've stated above, you can view TOST ratings for Growth, Momentum, Stability, Quality, and Sentiment here.
Bottom Line
TOST failed to meet the market's expectations in its most recent earnings report, and its dismal prognosis for the next quarters increased investors' concerns. In addition, the stock is currently trading below its 50-day and 200-day moving averages of $19.63 and $25.71, respectively, indicating a downtrend. So, considering its low profitability, we believe the stock is best avoided now.
How Does Toast Inc. (TOST) Stack Up Against its Peers?
While TOST has an overall D rating, one might want to consider its industry peers, VMware Inc. (VMW), Amdocs Ltd. (DOX), and Sapiens International Corporation N.V. (SPNS), which have an overall A (Strong Buy) rating.
TOST shares fell $0.28 (-1.50%) in premarket trading Monday. Year-to-date, TOST has declined -47.13%, versus a -13.29% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.
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