Shares of Toast (NYSE: TOST) recently received a positive boost from an analyst note by Dan Dolev at Mizuho. Dolev upgraded his rating on the stock to outperform and raised his price target to $33 per share. This new price target suggests a 21% gain over the next 12 months if the market views the restaurant software company in the same favorable light as Dolev does.
Is now the right time to consider buying Toast stock? Let’s examine the company’s strengths and challenges to determine if it may be a suitable addition to your investment portfolio.
### Reasons to Consider Buying Toast
Not too long ago, restaurant owners looking to modernize their businesses had to work with various vendors for different services. However, Toast was founded in 2012 to provide integrated solutions, simplifying the process for restaurant owners. By 2015, Toast had already signed up its 1,000th client, and its growth has been exceptional. As of March 31, Toast was servicing orders, payments, and other functions for 112,000 locations.
Toast earns a portion of each transaction, and its strong position in the restaurant industry is defensible. Dolev highlighted that Toast is effectively the fourth-largest retail merchant in the U.S., and the interchange fees collected by Visa and Mastercard on each transaction are generally lower for larger merchants. While Toast is currently reporting net losses, potentially lower interchange fees could give it a competitive edge in the long run.
Moreover, Toast has ample growth opportunities to pursue. Earlier this year, Toast launched a suite of software for digital storefront management and marketing services, in addition to its traditional restaurant management solutions. The company is also expanding internationally, with integrated online ordering services launched in the U.K., Canada, and Ireland in the first quarter.
### Reasons for Caution
Despite its growing popularity, Toast is still operating at a significant loss. The company reported a loss of $83 million in the first quarter of 2024 and $248 million over the past 12 months. While Toast has been running at a loss to achieve a size advantage, there is no guarantee that it will become profitable in the future. The stock is currently trading at approximately 58 times management’s expected adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the year.
Toast’s current market valuation implies ongoing rapid sales growth and a transition to profitability. If the company faces challenges or delays in achieving profitability, investors who purchase the stock at its current valuation could incur significant losses.
### Is It a Buy Now?
Toast may not be a stock for heavy speculation, but for investors with moderate to high risk tolerance, adding some shares to a diversified portfolio and holding onto them for at least five years could be a prudent move.
Revenue for Toast continues to rise, while operating expenses have stabilized in recent quarters. With the platform’s increased popularity, Toast’s sales representatives are becoming more efficient, potentially leading to strong profits in the future.
Before investing in Toast, it’s essential to weigh the risks and rewards carefully. Consider consulting with a financial advisor or conducting thorough research to determine if Toast aligns with your investment goals and risk tolerance.
### Consider the Alternatives
It’s crucial to explore a variety of investment options before making a decision. The Motley Fool Stock Advisor analyst team recently identified the 10 best stocks for investors to buy now, and Toast did not make the cut. These top picks have the potential to deliver substantial returns in the coming years.
The Stock Advisor service provides investors with a clear strategy for success, offering guidance on portfolio construction, regular updates from analysts, and two new stock picks each month. Since 2002, the Stock Advisor service has outperformed the S&P 500 by more than four times.
In conclusion, while Toast shows promise as a growth stock, it is essential to conduct thorough research and consider all factors before making an investment decision. By weighing the company’s strengths and challenges against your investment objectives, you can make an informed choice that aligns with your financial goals.
Source: https://finance.yahoo.com/news/toast-stock-could-soar-21-092900361.html