TOST Stock — What's In It For Investors?

Toast (TOST) stock has risen 1.5 % this morning. At $22.38 per share, the company is overvalued -- but it's essential that potential investors consider the company's mixed growth prospects and positive market sentiment before committing.

Toast, Inc. operates a cloud-based and digital technology platform for the restaurant industry in the United States and Ireland. The mid-cap Technology company has 3,172 full time employees and is based in Boston, United States.

TOST Has a Higher P/E Ratio Than the Sector Average

Compared to the Technology sector's average of 26.5, Toast has a trailing twelve month price to earnings (P/E) ratio of -16.6 and an expected P/E ratio of -57.4. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $-1.34 or forward earnings per share of $-0.39.

Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Toast's P/E ratio is higher than its sector average of 26.5, we can deduce that the market is overvaluing the company's earnings.

TOST Has an Alarming P/B Ratio

The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.

Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since Toast's P/B ratio of 10.4 is higher than its sector average of 5.57, such a margin of safety does not exist for the stock.

TOST's Weak Cash Flow Generation Is Troubling

The table below shows that Toast is not generating enough cash. A well run company will generally have cash flows that reflect the strength of its underlying business, and in Toast's case, free cash flow is growing at an average rate of 37.7% with a coefficient of variability of 73.3%. We can also see that cash flows from operations are evolving at a 51.3% rate, versus 46.6%:

Date Reported Cash Flow from Operations ($ MM) Capital expenditures ($ MM) Free Cash Flow ($ MM) YoY Growth (%)
2021-12-31 2 -19 -17 89.42
2020-12-31 -125 -36 -161 -13.98
2019-12-31 -126 -15 -141 n/a

Toast Is Not a Profitable Business

If you are looking to make TOST a long term investment, its weak margins may give you cause for concern. As you can see from the below, the company is generally losing money on each sale it makes. That being said, stock prices in the short term can be independent of a company's margins, and Toast's management may be able to make the business profitable in the future.

Toast's Gross Margins

Date Reported Revenue ($ MM) Cost of Revenue ($ MM) Gross Margins (%) YoY Growth (%)
2021-12-31 1,705 1,391 18.42 7.97
2020-12-31 823 683 17.06 83.05
2019-12-31 665 603 9.32 n/a

Toast's Operating Margins

Date Reported Total Revenue ($ MM) Operating Expenses ($ MM) Operating Margins (%) YoY Growth (%)
2021-12-31 1,705 542 -13.37 50.0
2020-12-31 823 361 -26.74 16.52
2019-12-31 665 275 -32.03 n/a

Toast's cost of revenue is growing at a rate of 58.5% in contrast to 40.7% for operating expenses. Sales revenues, on the other hand, have experienced a 65.5% growth rate. As a result, the average gross margins growth is 45.5 and the average operating margins growth rate is 33.3, with coefficients of variability of 32.9% and 40.0% respectively.

Toast Benefits From Positive Market Signals

The market sentiment regarding Toast is overwhelmingly positive. The stock has an average rating of buy and target prices ranging from $32 to $19. TOST is trading -8.54% away from its target price of $24.47. 7.3% of the company's shares are tied to short positions, and 77.1% of the shares are held by institutional investors.

Holder Shares Date Reported Percentage Value
Price (T.Rowe) Associates Inc 34,927,357 2022-09-29 12% $780,277,160
Vanguard Group, Inc. (The) 27,413,189 2022-09-29 10% $612,410,646
HMI Capital Management, LP 15,787,586 2022-09-29 6% $352,694,673
Durable Capital Partners LP 14,705,314 2022-09-29 5% $328,516,717
Generation Investment Management LLP 14,631,831 2022-09-29 5% $326,875,106
FMR, LLC 12,607,181 2022-09-29 4% $281,644,425
Blackrock Inc. 10,806,315 2022-09-29 4% $241,413,078
Tiger Global Management, LLC 9,899,895 2022-09-29 3% $221,163,655
Greenoaks Capital Partners LLC 9,263,367 2022-09-29 3% $206,943,620
T. Rowe Price Investment Management, Inc. 7,950,369 2022-09-29 3% $177,611,244
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.