Is it too late to buy toast stock?

shares of toast (TOST 1.00%) That’s an incredible 38% growth in less than three months. The maker of cloud-based restaurant management software also looks expensive from an earnings-based valuation perspective, currently trading at 62 times forward earnings and 611 times free cash flow.

These numbers make Toast seem like an overpriced market favorite, but that’s not all. Is it too late to jump on the toast high growth bandwagon in February 2024?

Let’s take a closer look.

Put Toast’s recent advances into context

Toast’s recent stock price rally may seem impressive at first glance, but it’s actually just a rebound from a deep fall in Wall Street’s bargain bin. The stock has fallen 5.7% over the past six months, is down 18% for the year, and is down more than 70% from its all-time high immediately following its 2021 initial public offering.

In other words, Toast’s stock price hasn’t skyrocketed into the stratosphere yet, it’s just rebounding from an unfortunate crash. With a market capitalization of $10.3 billion, the stock trades at an affordable 2.9x.

Have you seen these great business trends?

These sales are growing at an amazing pace. Toast’s revenue for the past four quarters reached up to $3.6 billion, a 45% increase over the same period last year.

Strong sales numbers often explain Toast’s lack of bottom line. As you know, the company is not yet on the verge of turning a profit. Instead, the company is spending all its excess cash on growth-promoting strategies, such as developing better software and ramping up its own sales and marketing efforts.

TOST Research and Development Expenditure (TTM) Data by YCharts

This is classic growth stock 101 stuff. Funds spent in the early stages of growth should be used to build a strong long-term customer base and revenue stream. Benefits may take several years. Toast’s profits are inching closer to breakeven every quarter, never mind how long it will take the company to break even.

How Toast fuels its strong growth story

The numbers suggest Toast will have value-seekers looking elsewhere, while growth-seekers may want to know more about this low-cost revenue rocket. That’s where it gets interesting. In my opinion, Toast is in the early stages of disrupting the huge restaurant management market with its award-winning all-in-one platform, aiming for world domination.

Today, most restaurants, bars, hotel services, fast food restaurants, and other food and beverage establishments rely on a patchwork of software solutions for various purposes. Menu management might be handled by one company, inventory tracking by another, payment processing by another, and staff scheduling might be done on a whiteboard in the break room.

These separate tools are rarely designed to work together. So get detailed sales data from one system and loyalty program demographics from another to successfully devise an effective local advertising program. Toast does all of this and happily shares useful data between different parts of the platform.

I’m not going to open a Swedish pancake or meatball food truck or anything like that, but if I were to open one, I would be looking for this kind of end-to-end software platform from day one. Combined with Toast’s strong expansion strategy of flooding sales teams and consultants into a small number of local markets to build effective word-of-mouth buzz, the company’s impressive growth rate is not at all surprising.

Carpe tostem (grab a toast)!

Stocks began falling six months ago, keeping pace with the most volatile market indexes as the economic recovery hit a plateau. The decline was punctuated by Toast’s third-quarter earnings release. Although this earnings release exceeded expectations, the bar for fourth-quarter results was set low. Toast stock underwent a quick 20% haircut, reconnecting with the broader trend of volatile growth stocks amid positive economic signs.

So while we may have missed out on even deeper discounts in recent weeks, Toast stock looks highly undervalued at the moment. How the recovery in restaurant traffic affected Toast’s business over the holiday period, and how market makers will react if management sets the bar a little higher for next year’s guidance. I’m looking forward to it.

Of course, only time will tell. Either way, I highly recommend taking a bite of this great growth stock before you start growing in earnest. Despite recent economic pressures, Toast seems to me to be a great long-term investment with this bargain bin price to sales ratio.