Growth stocks that I have been paying attention to are: toast (NYSE:TOST).
The stock went public in September 2021 at $40. However, after breaking out of the trap and reaching $59, it has since been cut in half and is currently trading at $24.
Here's why I think some people on Wall Street may be missing the trick here.
Shopify for restaurants
Toast provides a state-of-the-art cloud-based restaurant management platform. It is an all-in-one operating system that includes a POS device and various software tools for marketing, online ordering, accounting, and loyalty program setup.
We also offer loans ranging from $5,000 to $300,000 to qualified customers.
Essentially, Toast handles all the behind-the-scenes work so restaurants can focus on providing the best possible service to their customers.
In that sense, I remember Shopifyprovides digital infrastructure that allows businesses to easily set up and seamlessly operate online stores.
Once a restaurant is integrated into Toast's system, I think they will be very cautious about changing providers. Therefore, there is not only recurring revenue here, but also a competitive advantage in the form of high switching costs.
Backlash over fees
Now, it's worth pointing out that Toast had to cut half its workforce in the first half of 2020 when the pandemic forced customers to close their doors. Therefore, another health emergency poses a significant risk.
Additionally, a scandal broke last summer in which the company added a $0.99 fee to online orders over $10. This was added to customers' bills without the restaurant owner's consent.
However, following backlash, management quickly removed fees from digital ordering channels. Still, there was some reputational damage.
delicious growth
But importantly, the incident has not had a negative impact on the company's customer growth. More than 6,500 net new restaurants were added in the fourth quarter, bringing the total to approximately 106,000 by the end of 2023.
Annual revenue increased 42% year over year to $3.9 billion, and gross profit increased 63% to $834 million. Annual recurring run rate (ARR), including subscriptions, increased by 35% to over $1.2 billion.
However, Toast remains unprofitable, posting an annual net loss of $246 million. I'm not worried at this stage as the company is still in growth mode and focused on customer acquisition.
Looking ahead, brokers expect revenue to grow in the mid-20s, reaching $5.9 billion by the end of 2025.
As a result, the stock's expected sales multiples for 2024 and 2025 are 2.54x and 2.07x, respectively.
However, analysts expect net income to be $377 million by 2025. If this is accurate, the stock's forward price/earnings ratio (PER) would be approximately 35 times. I think this is attractive given the tremendous growth potential here.
I'm very interested
Toast estimates there are 860,000 restaurant locations in the United States alone. Worldwide, that number stands at around 22 million, which suggests there is plenty of room to grow beyond 106,000.
In fact, the company appears to have just scratched the surface of the long-term market opportunity.
However, the consensus 12-month price target among analysts is currently just $24. Only 13 out of 26 analysts rate it a buy.
So I think Wall Street may be significantly undervaluing this growth stock. So I promoted it to my to-buy list.
The post 1 Tech Growth Stocks That Could Soar (And Wall Street Is Sleeping On Their Growth Stocks!) appeared first on The Motley Fool UK.
Read more
Ben McPoland has a position at Shopify. The Motley Fool recommends Shopify and Toast. The views expressed on the companies mentioned in this article are those of the writer and may differ from official recommendations we make on subscription services such as Share Advisor, Hidden Winners, or Pro. At The Motley Fool, we believe that considering diverse insights makes us better investors.
The Motley Fool UK 2024
