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Toast (TOST): $14.02
Market Cap: $7.47B
Enterprise Value: $6.58B
Key Insights
A couple of weeks ago, I met some friends in Eugene, Oregon to watch the Ducks play the Cal Bears at Autzen stadium. The following morning, we decided to grab breakfast at a local pancake place called The Original Pancake House where the food was excellent and the service even better. When we received the receipt for our breakfast, I noticed that the restaurant had used Toast for payment.
Last week, I grabbed dinner in Dallas, Texas, before the IDEAS investor conference I wrote about in our mid-month update titled Water Desalination and The Dune Express. Once again, the receipt generated was from a handheld Toast device. I first came across Toast a couple of years ago, shortly after the company went public in a September 2021 IPO priced at $40 per share. I was reminded of it again a few weeks ago when I met a group of investors in the San Francisco Bay Area for lunch. One of them, who focuses on investing in technology companies, mentioned that he liked the company’s prospects because the company has an integrated suite of products that go well beyond payments and function like the restaurant’s operating system.
The restaurant industry is one of the largest industries in the US, with $900 billion in annual U.S. sales. Since the start of the COVID-19 pandemic, 57% of Americans have maintained their preference for takeout or delivery, while 43% still prefer dining out. 76% of restaurateurs changed their point-of-sale (POS) system in the last year, and 66% of those opted for a system with an integrated payment solution.
Based in Boston, Massachusetts, and founded in 2011 by Aman Narang, Steve Fredette, and Jonathan Grimm, the company was initially known as Opti Systems and rebranded to Toast in 2012.
Company
Toast is a comprehensive digital technology platform designed specifically for the restaurant community. It operates as a cloud-based, all-in-one solution, offering a unified platform of Software as a Service (SaaS) products and financial technology solutions. This platform equips restaurants with the tools necessary to manage various aspects of their business, including point of sale, operations, digital ordering and delivery, marketing and loyalty, as well as team management.
By serving as the restaurant operating system across dine-in, takeout, and delivery channels, Toast helps restaurants streamline operations, increase revenue, and deliver good guest experiences.
Toast has evolved beyond its origins as a specialized Point of Sale (PoS) system for restaurants. The company is strategically positioning itself to be the software management platform of choice for restaurants, providing a competitive edge against more generalized competitors, notably Square.
Leadership Transition
On September 5, 2023, Toast announced that co-founder and current COO Aman Narang had been appointed as the Chief Executive Officer, effective January 1, 2024. Mr. Narang, who served as Toast’s Co-President since December 2012 and as Chief Operating Officer since June 2021, will assume the role of CEO from Chris Comparato.
Mr. Comparato has been at the helm as the company’s CEO since February 2015. Mr. Comparato will also step down from his role as Chairperson. Both Mr. Comparato and Mr. Narang will remain on board.
Co-founders Steve Fredette, Jonathan Grimm, and Aman Narang as well as Chris Comparato had previously worked at Endeca (acquired by Oracle). At Toast, for over a year, COO Aman Narang has been participating in all of the company’s earnings calls alongside Mr. Comparato, addressing analysts’ questions. This implies that this transition was probably already in the making and was not a sudden development, which aligns with the fact that Mr. Comparato will continue to serve on Toast’s board of directors.
Under Mr. Comparato’s guidance, the company grew to 4500 employees and about 93k restaurant locations. He also led the company through its initial public offering in 2021.
Although no reason was given for Mr. Comparato’s departure, the leadership shakeup occurred within two months of Toast’s decision to backtrack on a contentious .99-cent fee for all orders exceeding $10. According to Toast, this was to help cover its costs as it aimed to become EBITDA profitable this year.
The introduction of the order processing fee in June sparked widespread discontent among Toast customers because it added charges to restaurants’ customers without the restaurants’ approval. Following extensive negative feedback, Toast opted to remove the fee a month later. CEO Chris Comparato acknowledged the decision as a “mistake” and assured that such an error would not be repeated.
Furthermore, effective January 1, 2024, Mark Hawkins, Lead Independent Director, and former President and CFO of Salesforce, is set to assume the role of Chair of the Toast Board of Directors.
In his role as CEO, Mr. Narang will initially continue to receive his current annual salary of $20,000 (yes, just $20,000). His total compensation for 2022 amounted to $3.7 million.
CEO Chris Comparato’s Unloading of 58,000 Shares Raises Concerns
In October, CEO Chris Comparato executed a substantial sale of 58,000 shares, amounting to a total of $1.03 million. Notably, this follows a pattern of high-volume share sales initiated in June, all executed through a Rule 10b5-1 plan implemented on February 24, 2023. This plan is structured to automatically execute trades based on specific predetermined conditions, such as share price, quantity, and transaction date. Such trading plans serve the purpose of mitigating the risk of insider trading but have been gamed in the past.
Incoming CEO Aman Narang also engaged in significant selling activity, disposing of 248,509 shares at an average price of $20.41 per share, totaling $5.07 million. This occurred in September, shortly after the announcement of the leadership transition.
You can view the rest of the insider transactions at Toast here.
Restaurant Association’s Restaurant Performance Index
The National Restaurant Association’s Restaurant Performance Index (RPI) is a monthly composite index that tracks the health of the U.S. restaurant industry.
The RPI is measured in relation to a neutral level of 100. Index values above 100 indicate that key industry indicators are in a period of expansion, while index values below 100 represent a period of contraction for key industry indicators. The index consists of two components: the Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor and capital expenditures), and the Expectations Index, which measures restaurant operators’ six-month outlook for those four indicators.
The National Restaurant Association’s Restaurant Performance Index (RPI) posted a modest decline in September to 100.4, down 0.2% from a level of 100.5 in August.
Restaurant operators reported mixed same-store sales and customer traffic results in September, continuing a trend that has been in place for much of the past year. Looking forward, restaurant operators’ outlook for sales has deteriorated somewhat in recent months.
Reviewing Toast’s situation, the company is expecting a decline in revenue growth for the fourth quarter of 2023. This anticipation is based on the disclosure of a slowdown in same-store restaurant sales during the third quarter, a trend that extended into October, as outlined by CFO Elena Gomez in the analyst call.
Toast now expects to exit Q4 with SaaS (service as a subscription) average revenue per user growth (“ARPU”) in the mid-to-high single digits.
Key Insights From Q3 2023 Earnings Call
According to incoming CEO and Co-Founder Aman Narang:
“Our vertical focus on restaurant continues to be an advantage as we open up deeper parts of the TAM and expand ARPU by building differentiated products for the industry.
As we continue to broaden our products for our go-to-market team to serve a variety of customers types and pinpoints. Our upsell team becomes increasingly important to drive growth for the adoption of our platform across our customer base. As we approach 100,000 locations and beyond our upsell teams can get bigger, and we continue to see this as a big opportunity for growth in our business over time.
CEO Elena Gomez said, “In addition, in the back half of the third quarter, we saw a modest slowdown in same-store transaction volume which resulted in a decline in GPV per-processing location in the quarter. Trends have remained stable since then.”
Toast’s revenue reached $1.03 billion, marking a 37% year-over-year increase.
In terms of profitability, Toast achieved a record-adjusted EBITDA margin of 3.4% in the quarter.
Toast’s total locations increased by 34% year-over-year, approaching the milestone of nearly 100,000 locations. The company added over 6,500 net new locations in the third quarter of 2023.
Peers
Toast is significantly trailing behind its counterpart, Shift4 Payments (FOUR). The table below provides a comparison of the four companies.
Valuation
The company has a market cap of $7.47 billion, an enterprise value of $6.81 billion, and no debt. The forward EV/EBITDA ratio is 139.72 and the company is unprofitable on a GAAP basis.
Third Quarter 2023 Financial Results (Press Release) (Investor Presentation)
Fourth Quarter 2023 Outlook:
Full Year 2023 Outlook:
Conclusion
The restaurant industry is expected to report annual sales of $997 billion in 2023. The landscape is swiftly evolving, with a notable shift towards the off-premises market encompassing carryout, delivery, drive-thru, and mobile units, which is expected to be the primary driver of industry growth in the next decade.
According to the National Restaurant Association, by 2030, the industry’s sales will top $1.2 trillion. The expansion will be facilitated by a well-established technological framework by companies like Toast. Weight loss drugs like Ozempic might reduce consumer appetites for eating out.
Beyond the mixed outlook for the industry, challenges and concerns remain for companies like Toast that operate in a highly competitive space. The key concern is the sudden deceleration of revenue growth based on the company’s forecast for Q4 2023. Investors may express concerns about incoming CEO Mr. Narang’s limited experience in managing a public company.
Toast was valued as a company that was expected to grow rapidly and improve margins over time as software revenue augmented lower margin payments revenue. We were initially very excited by this story but the flatlining of revenue gave us pause. We look forward to adding Toast to our internal watchlist and observing how the company performs under the new CEO from a safe distance.
Sudden Departures
CEO
CFO
General Counsel
Others
Appointments
1. Advance Auto Parts (AAP): $52.59
On November 13, 2023, Advance Auto Parts appointed Ryan P. Grimsland to the position of Executive Vice President and Chief Financial Officer, commencing November 27, 2023.
| MarketCap: $3.11B | Avg. Daily Volume (30 days): | Revenue (TTM): $11.30B |
| Net Income Margin (TTM): -59.60% | ROE (TTM): -55.70 | Net Debt: $4.16B |
| P/E: 15.29 | Forward P/E: 15.20 | EV/EBIDTA (TTM): 10.46 |
| P/S (TTM): 0.28 | P/B (TTM): 1.18 | 52 Week Range: $47.73 – $154.95 |
2. Genpact Ltd (G): $33.46
On November 8, 2023, Genpact Limited announced that its Board of Directors had appointed Balkrishan “BK” Kalra as President and Chief Executive Officer effective February 9, 2024.
| MarketCap: $6.07B | Avg. Daily Volume (30 days): 1,382,446 | Revenue (TTM): $4.43B |
| Net Income Margin (TTM): 19.88% | ROE (TTM): 20.99% | Net Debt: $995.99M |
| P/E: 14.49 | Forward P/E: 18.32 | EV/EBIDTA (TTM): 9.83 |
| P/S (TTM): 1.41 | P/B (TTM): 3.02 | 52 Week Range: $29.41 – $48.08 |
3. Primo Water Corporation (PRMW): $14.49
On November 15, 2023, Primo Water Corporation announced the appointment of Robbert Rietbroek as Chief Executive Officer, effective January 1, 2024.
| MarketCap: $2.31B | Avg. Daily Volume (30 days): 1,113,191 | Revenue (TTM): $2.29B |
| Net Income Margin (TTM): N/A | ROE (TTM): N/A | Net Debt: $1.54B |
| P/E: 19.93 | Forward P/E: 15.36 | EV/EBIDTA (TTM): 8.97 |
| P/S (TTM): 1.02 | P/B (TTM): 1.79 | 52 Week Range: $12.13 – $16.10 |
4. PepsiCo Inc. (PEP): $169.22
On November 5, 2023, PepsiCo, Inc. appointed James Caulfield currently Senior Vice President, Chief Financial Officer, PepsiCo Foods North America, to assume the role of Chief Financial Officer of the company, effective November 30, 2023.
| MarketCap: $235.42B | Avg. Daily Volume (30 days): 5,258,987 | Revenue (TTM): $91.62B |
| Net Income Margin (TTM): -12.26% | ROE (TTM): -18.26% | Net Debt: $34.49B |
| P/E: 28.23 | Forward P/E: 20.70 | EV/EBIDTA (TTM): 16.75 |
| P/S (TTM): 2.55 | P/B (TTM): 12.37 | 52 Week Range: $155.83 – $192.79 |
5. Applovin Corp (APP): $39.24
On November 3, 2023, AppLovin appointed Matthew Stumpf, the company’s current Vice President of Finance and FP&A, to serve as Chief Financial Officer, effective January 1, 2024.
| MarketCap: $13.18B | Avg. Daily Volume (30 days): 3,510,813 | Revenue (TTM): $3.03B |
| Net Income Margin (TTM): 150.59% | ROE (TTM): 173.83% | Net Debt: $2.85B |
| P/E: 142.15 | Forward P/E: 14.01 | EV/EBIDTA (TTM): 18.03 |
| P/S (TTM): 4.77 | P/B (TTM): 12.02 | 52 Week Range: $9.14 – $45.11 |
1. Fisker Inc. (FSR): $2.12
On November 14, 2023, Florus Beuting, the Chief Accounting Officer of Fisker Inc. provided notice of his intent to resign from the company effective immediately within two weeks of being appointed to the role.
| MarketCap: $727.67M | Avg. Daily Volume (30 days): 16,461,719 | Revenue (TTM): $73.13M |
| Net Income Margin (TTM): 99.60% | ROE (TTM): -16.34% | Net Debt: $648.28M |
| P/E: -1.50 | Forward P/E: 11.78 | EV/EBIDTA (TTM): -2.98 |
| P/S (TTM): 9.53 | P/B (TTM): 2.12 | 52 Week Range: $1.99 – $8.66 |
2. Manchester United Plc. (MANU): $19.09
On November 15, 2023, Manchester United plc announced that Richard Arnold has decided to step down as Chief Executive Officer of Manchester United after 16 years with the club.
| MarketCap: $3.10B | Avg. Daily Volume (30 days): 880,507 | Revenue (TTM): $823.44M |
| Net Income Margin (TTM): 78.32% | ROE (TTM): 62.81 | Net Debt: $688.29M |
| P/E: -85.46 | Forward P/E: N/A | EV/EBIDTA (TTM): 19.11 |
| P/S (TTM): 3.83 | P/B (TTM): 23.80 | 52 Week Range: 16.29 – $27.34 |
3. Goodyear Tire & Rubber Co. (GT): $14.09
On November 10, 2023, Richard J. Kramer, Chairman, Chief Executive Officer and President, informed the Board of Directors of The Goodyear Tire & Rubber Company of his plans to retire in 2024.
| MarketCap: $4.00B | Avg. Daily Volume (30 days): 4,471,602 | Revenue (TTM): $20.32B |
| Net Income Margin (TTM): N/A | ROE (TTM): N/A | Net Debt: $8.67B |
| P/E: -7.99 | Forward P/E: 10.80 | EV/EBIDTA (TTM): 9.52 |
| P/S (TTM): 0.20 | P/B (TTM): 0.80 | 52 Week Range: $9.66 – $16.51 |
4. Bumble Inc. (BMBL): $14.18
On November 6, 2023, Bumble Inc. (BMBL) approved a leadership succession plan following which Whitney Wolfe Herd, the company’s Founder and Chief Executive Officer, will become the Executive Chair of the Board and no longer serve in the capacity of Chief Executive Officer effective January 2, 2024.
| MarketCap: $2.66B | Avg. Daily Volume (30 days): 3,365,999 | Revenue (TTM): $1.02B |
| Net Income Margin (TTM): 4.41% | ROE (TTM): -10.45% | Net Debt: $197.39M |
| P/E: -19.93 | Forward P/E: 39.37 | EV/EBIDTA (TTM): 21.41 |
| P/S (TTM): 1.86 | P/B (TTM): 1.15 | 52 Week Range: $$12.29 – $27.92 |
5. Valero Energy Corp. (VLO): $125.36
On November 6, 2023, Lawrence M. Schmeltekopf and Senior Vice President and Chief Accounting Officer of Valero Energy Corporation informed the company that he intends to retire on January 2, 2024.
| MarketCap: $42.68B | Avg. Daily Volume (30 days): 3,081,418 | Revenue (TTM): $145.46B |
| Net Income Margin (TTM): 9.71% | ROE (TTM): -17.80% | Net Debt: $5.61B |
| P/E: 4.26 | Forward P/E: 8.71 | EV/EBIDTA (TTM): 2.90 |
| P/S (TTM): 0.30 | P/B (TTM): 1.64 | 52 Week Range: $101.58 – $155.04 |
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