toast (TOST -1.59%) went public a little over two years ago. It was a difficult time, with shares down 75% since then. And today, the stock is down more than 40% from its 52-week high of $27.
The company’s point-of-sale devices help simplify restaurant operations. Not only does it help process transactions, but it also integrates with marketing activities and makes planning easier. And since the company is still in its early stages of growth, there is still plenty of room for Toast to grow in the future.
Is it worth investing in the company despite the stock’s disappointing performance?
Toast’s growth rate has declined sharply
On November 7th, Toast reported its third quarter results. Revenue rose 37% year over year to just over $1 billion. While that’s a strong growth rate for the tech company — and for most other companies — it’s also well below the growth it’s achieved in previous periods.
For the final quarter of the year, the company expects revenue to be on par with the third quarter, which would still be 30% higher than the $769 million in revenue the company posted a year ago. What makes the development all the more worrying is that the company is not generating any further growth quarter-on-quarter.
Although Toast’s devices can be found in 99,000 locations, the company isn’t running out of growth opportunities because the restaurant industry is huge. Still, the loss of selling momentum explains why investors haven’t been too bullish on the stock lately.
There Are Improvements in the company
Toast’s strong growth has helped reduce the company’s losses, but it hasn’t yet broken even. In its most recent quarter, the company posted an operating loss of $59 million, an improvement from the loss of $85 million in the same period last year. The risk, however, is that if growth slows further, no significant improvements in the bottom line are expected.
Another positive aspect is that the company generated positive free cash flow. This is a good sign for investors as it suggests the company is sustainable and may be able to fund its own growth without relying heavily on issuing shares. The most important thing to watch is whether this pattern continues, as cash flow can fluctuate significantly from one period to the next.
Toast is a cheap stock
Toast’s business is not profitable, so a price-to-earnings ratio cannot help investors value the business. But in terms of value for money, it could be a potential bargain. Since the stock trades at just twice its previous sales, investors don’t have to pay a large premium to own a piece of the company. Additionally, the price is just a few dollars away from its 52-week low of $13.77.
And although analysts have recently lowered their price targets on the growth stock, the analyst consensus price target remains above $20. Price targets are by no means a guarantee of where the stock will go, but they can provide an indication of how much growth potential analysts see for the company in the near future.
Should you invest in Toast?
Toast stock looks attractive for several reasons. Its low valuation has made it more attractive. And as more restaurants embrace automation and more integrated technological point-of-sale devices, Toast could do well as the industry appears to be becoming more tech-savvy. Although the company still carries some risk, it appears to be on a positive trajectory.
For investors willing to be patient with the stock and buy and hold, Toast could be an underrated investment to buy today.