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 (%)|
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 (%)|
Toast's Operating Margins
|Date Reported||Total Revenue ($ MM)||Operating Expenses ($ MM)||Operating Margins (%)||YoY Growth (%)|
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.
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