Shares of Toast (TOST 1.97%) dipped despite the cloud-based restaurant management software company reporting strong Q2 results and increasing its guidance. The stock is up about 20% year to date after the pullback.
Let’s look at the company’s most recent quarterly results and future prospects to see if now is a good time to buy the stock on the dip.
In Q2, Toast saw strong momentum both within its core U.S. local restaurant business, as well as new growth areas, such as large-scale chains, food and beverage retailers, and international markets. The company added a record 8,500 net new locations during the quarter, bringing the total to approximately 148,000 locations. That was a 24% increase year over year.
It now serves more than 10,000 locations across its newer segments. It added Firehouse Subs, a 1,300-location quick service brand, and New York grocer Zabar’s to its clients in the quarter. It also recently launched in Australia, entering its fourth international market.
The company said it saw strong market share gains, particularly in its top 10 markets where it already has more than 30% penetration. It said new features and products like its handheld Toast Go 3 device and its AI-powered intelligence engine ToastIQ are resonating with customers. Meanwhile, it just announced a partnership with American Express to bring together reservation listings from Resy, Tock, and Toast Tables into its mobile app, Toast Local.
Overall, Toast’s total Q2 revenue climbed 25% to $1.55 billion. Subscription revenue soared 37% to $227 million, while financial technology revenue jumped 25%. Its annual recurring revenue (ARR), which consists of its subscription revenue and its fintech gross profits annualized for the full year, rose by 31% to $1.9 billion. ARR is generally the most important metric for Toast given the big difference in gross margins between its subscription business and its fintech revenue.
Toast’s gross payment volume (GPV), which is the payments the company processes for its restaurant customers, increased by 23% to $49.9 billion.
Earnings per share (EPS) soared from $0.02 to $0.13 in the quarter. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), meanwhile, skyrocketed 75% from $92 million a year ago to $161 million.
Looking ahead, Toast raised its full-year forecast for both revenue and adjusted EBITDA. It now projects subscription services and fintech gross profit to be in a range of $1.815 billion to $1.835 billion, representing 28% to 29% growth, with adjusted EBITDA between $565 million and $585 million.
Source: Toast press releases
For the third quarter, Toast is looking for subscription services and financial technology solutions gross profit to grow by 23% to 26% to between $465 million and $475 million, with adjusted EBITDA of between $140 million and $150 million.
Overall, Toast is firing on all cylinders and is one of the best stories in the software-as-a-service (SaaS) space. The company continues to innovate, which is attracting more and more customers to its platform. Meanwhile, its technology is meant to help its restaurant customers drive sales and operate more efficiently, which benefits Toast through its payment processing platform.
The company is becoming the clear market leader in the local restaurant technology space, and it has a long runway of growth in front of it. It is also starting to gain momentum with enterprise chain restaurants, food retailers, and in international markets. These are all large untapped opportunities.
I believe the best way to value Toast is based on its ARR, which for 2025 should come in around $2.1 billion. Based on that, the stock trades at an 11.5 times enterprise value-to-ARR multiple, which, given its approximately 30% ARR growth, is still very reasonable.
Given the strong growth opportunities still ahead and Toast’s reasonable valuation, I would be a buyer of the stock on this current dip in price.
