Toast (TOST) Has a Bright Future, Wait for a Dip to Buy the Stock

Toast stock went public in a direct listing on Sept. 22. The company ended up raising more than $870 million in its IPO. Due to high demand for its shares, Toast raised its IPO price twice and finally settled at a price of $40 for the IPO listing. However, the market seemed to be a little more exuberant. The stock ended up 56 percent higher on its debut day and ended the session at $62.5. What's Toast's (TOST) stock forecast for 2025 and how high can it go?

Toast’s software platform helps restaurants in areas like payment processing, digital ordering, and marketing and loyalty programs. The company also sells devices that go with its software and offers credit to its restaurant customers. The company was founded in 2012 in Cambridge, Mass., and is backed by TPG, Tiger Global Management, and Bessemer Venture Partners.

According to Report Linker, the global restaurant management software industry was estimated at $4 billion in 2020 and is expected to reach $8.2 billion by 2027—a CAGR of 13.3 percent. Toast is well-positioned to take advantage of this tremendous growth opportunity. The company is looking for more U.S. expansion and is also focused on expanding to international markets.

Going forward, a lot will depend on the length of the COVID-19 pandemic and how quickly restaurants rebound from it. Still, it's reasonable to expect the stock’s price to double in the coming 2–3 years due to the strength of its offerings and the broader interest in this market.

Toast’s valuation swelled from under $5 billion in February 2020 to $8 billion in November 2020 due to its strategy to adapt to the new reality post-pandemic. After its trading debut, the company is being valued at close to $31 billion now.

Compared to Square’s 2020 price-to-sales multiple of 7.6x, Toast is trading at a much higher valuation of 35x. CNBC Mad Money host Jim Cramer also thinks that the valuation for Toast stock is too steep currently given high competition, not enough earnings, and clients that are still struggling from the pandemic-driven slowdown.

Toast has recovered and thrived after being hit by the COVID-pandemic, which was especially severe for restaurants. The company adapted quickly to the new reality and started offering online or mobile phone ordering through its software. Toast switched from its focus on in-person dining. Its platform users went up to 48,000 compared to 27,000 in 2019.

Toast’s revenues increased by over 100 percent YoY in H1 2021 to $704 million. However, the company is still loss-making and is even raking in higher progressive losses. Toast is in the high growth phase and is still investing to expand its business.

While Toast is operating in a high-growth space with strong numbers of its own, it has a lot of competition, including from well-established players like Jack Dorsey-backed Square. After the recent surge, the valuation doesn’t seem to be on its side. It would still make sense to own the stock after the initial exuberance around the stock dies and it comes to a more reasonable valuation.