Toast, Inc. ($TOST) Investment Thesis: A Slice of the $16 Billion Restaurant Tech Revolution

Toast, Inc. (TOST): Riding the Restaurant Tech Wave

Executive Summary

Buy | Target Price: $47 | Time Horizon: 12-18 months

Toast, Inc. (TOST) presents a compelling investment opportunity within the burgeoning restaurant technology sector. We initiate coverage with a Buy rating and a 12-month price target of $47, representing an 18% upside from the current market price. Our conviction is underpinned by Toast’s robust growth trajectory, expanding profitability, and entrenched competitive advantages within a $16 billion total addressable market (TAM).¹ While recent market volatility and a Q1’25 EPS miss sparked some concern, we view these as short-term headwinds against a backdrop of strong Annual Recurring Revenue (ARR) growth (31%) and expanding FinTech profit margins (37%). The current valuation of 5.6x EV/Sales (2025e) undervalues the company’s accelerating profitability and potential market share gains, derived from its rapidly expanding customer base of over 140,000 locations. Key catalysts include successful international expansion and continued adoption of its AI-powered product suite. Positive sentiment on X surrounding new product launches and partnerships further supports our bullish outlook.

Industry Overview

The global restaurant technology market is experiencing rapid transformation, driven by increasing digital adoption, evolving consumer preferences, and the ongoing need for operational efficiency. The market is estimated at $16 billion, with a projected 15% compound annual growth rate (CAGR) over the next five years.² This growth is fueled by several key trends:

• Accelerated digital ordering penetration, growing at over 300 basis points annually.³
• Heightened demand for labor optimization solutions in a tight labor market.
• Continued rise in card payment volumes, driving demand for integrated payment processing solutions.

Within this dynamic landscape, Toast is well-positioned to capitalize on these secular tailwinds with its comprehensive platform offering.

Company Analysis

Toast offers an integrated suite of software and hardware solutions designed specifically for the restaurant industry. Its core offerings include:

• Cloud-based point-of-sale (POS) systems
• Kitchen display systems (KDS)
• Handheld ordering devices
• Payroll and team management tools
• Inventory management solutions
• Marketing and loyalty programs
• Integrated payment processing

Toast’s revenue streams are diversified across three key segments:

• Subscription: Recurring revenue from software licenses (35% of total revenue)
• FinTech Solutions: Primarily payment processing fees (52% of total revenue)
• Hardware/Services: Sales and installation of POS hardware and other related services (13% of total revenue)

The company boasts a rapidly expanding customer base of over 140,000 restaurant locations, representing a 25% year-over-year increase.⁴ Its clientele ranges from small and medium-sized businesses (SMBs) to large enterprise chains such as Cafe Rio.

Investment Thesis

Our investment thesis rests on three pillars:

1. First-Mover Advantage in a Consolidating Market: Toast is a leading player in the restaurant technology space, benefiting from early adoption and a strong brand reputation. Its integrated platform offering provides a significant competitive advantage, allowing it to capture market share from legacy providers and smaller point solutions.
2. Robust Growth Driven by Secular Tailwinds: Toast is poised to benefit from the ongoing digital transformation of the restaurant industry. Increasing adoption of online ordering, delivery, and other digital solutions is driving demand for Toast’s integrated platform, fueling strong revenue growth and expanding profit margins.
3. Attractive Valuation Relative to Growth Potential: Despite its strong growth prospects, Toast trades at a discount to its peers on key valuation metrics, offering an attractive entry point for long-term investors. We believe the market is underestimating the company’s long-term earnings potential and the durability of its competitive advantages.

Valuation & Forecasts

We employ a discounted cash flow (DCF) analysis to arrive at our target price of $47. Our key assumptions include:

We also conducted sensitivity analysis and scenario planning to assess the potential impact of varying growth rates and margin assumptions. Our base case scenario, which we assign a 50% probability, suggests a target price of $47. A bull case scenario (30% probability) with higher growth and margin expansion implies a target price of $58, while a bear case scenario (20% probability) with slower growth and margin compression suggests a target price of $22.

Relative valuation analysis further supports our bullish view. Toast trades at a discount to its peer group on key metrics, including EV/Sales and forward P/E.⁵

Risks

While we are optimistic about Toast’s long-term prospects, we acknowledge several key risks:

• Competition: The restaurant technology market is increasingly competitive, with established players like Square and Fiserv/Clover vying for market share. Increased competition could pressure pricing and margins.
• Macroeconomic Sensitivity: The restaurant industry is cyclical and sensitive to macroeconomic downturns. A recessionary environment could negatively impact restaurant spending and, consequently, Toast’s growth trajectory.
• Execution Risk: Toast’s continued success depends on its ability to execute its growth strategy, including successful international expansion and product innovation. Delays or setbacks in these areas could hinder growth.
• Payment Margin Compression: Rising interchange fees and increased competition in payment processing could pressure Toast’s FinTech margins.
• Customer Concentration: A significant portion of Toast’s revenue is derived from a relatively small number of large enterprise customers. Loss of these key customers could materially impact revenue.

Recommendation

We initiate coverage on Toast, Inc. (TOST) with a Buy rating and a 12-month price target of $47. We believe Toast is well-positioned to capitalize on the ongoing digital transformation of the restaurant industry, driven by its integrated platform, expanding customer base, and attractive valuation. While acknowledging the inherent risks, we believe the long-term growth potential outweighs the near-term challenges. We recommend a portfolio weighting of 3-5% for growth-oriented investors.

¹ Source: Internal estimates based on industry reports and company filings.

² Source: ResearchAndMarkets, “Restaurant Management Software Market – Global Outlook & Forecast 2023-2028”

³ Source: Statista, “Digital Ordering Penetration in the Restaurant Industry”

⁴ Source: Toast, Inc. Q1 2025 Earnings Release.

⁵ Source: Bloomberg, Capital IQ, Peer group includes SQ, FISV, PAYC.