1 tech growth stock that could soar (and Wall Street is sleeping on it!)

Ben McPoland highlights one US growth stock whose potential over the long term may well be underestimated by the market today.

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Key Points

  • Toast's top-line growth has been eye-catching and restaurants continue to flock to its platform.
  • The company is moving towards profitability, despite a controversy last year over an order processing fee.
  • Huge growth potential might not be adequately reflected in the stock's valuation.

A growth stock I’ve had my eye on for some time now is Toast (NYSE: TOST).

The shares went public in September 2021 at $40. However, after flying out of the traps and reaching $59, they’ve since been cut in half and currently trade for $24.

Here’s why I reckon some on Wall Street might be missing a trick here.

The Shopify of restaurants

Toast provides a leading cloud-based restaurant management platform. Its an all-in-one operating system that includes point-of-sale devices and various software tools for marketing, online ordering, accounting, and setting up loyalty programmes.

It also offers loans to eligible customers ranging from $5,000 to $300,000.

Basically, Toast takes care of all the behind-the-scenes stuff so that restaurants can focus on giving their customers the best possible service.

In this sense, it reminds me of Shopify, which provides the digital infrastructure allowing businesses to easily set up and seamlessly run online stores.

Once a restaurant integrates into Toast’s system, I imagine it would be very wary about changing providers. So, as well as recurring revenues, there is a competitive advantage here in the form of high switching costs.

A backlash over fees

Now, it’s worth pointing out that Toast had to cut half its workforce in the first half of 2020 when its customers were forced to close during the pandemic. Therefore, another health emergency is a key risk.

Additionally, there was a scandal last summer after the company added a $0.99 processing fee to online orders over $10. It was putting this on customers’ bills without the consent of restaurant owners.

However, due to the backlash, management quickly removed the fee from its digital ordering channels. Nevertheless, there was a degree of reputational damage.

Tasty growth

Importantly though, this mishap hasn’t negatively affected the firm’s customer growth. It added over 6,500 net new restaurants in the fourth quarter, bringing its total to approximately 106,000 locations by the end of 2023.

Annual revenue grew 42% year over year to $3.9bn while gross profit surged 63% to $834m. Its annualised recurring run-rate (ARR), which includes subscriptions, increased 35% to over $1.2bn.

However, Toast remains unprofitable, recording an annual net loss of $246m. This doesn’t worry me at this stage as the company is still in growth mode and focused on customer acquisition.

Looking ahead, brokers see revenue growing in the mid-20% range to reach $5.9bn by the end of 2025.

This puts the stock on low forward price-to-sales multiples of 2.54 and 2.07 for 2024 and 2025, respectively.

But analysts also see net income of $377m by 2025. If accurate, this gives the stock a forward price-to-earnings (P/E) ratio of around 35. I think that’s attractive given the tremendous growth potential here.

I’m very interested

Toast estimates there are 860,000 restaurant locations just in the US. Globally, there are around 22m, which suggests plenty of room to grow beyond its 106,000 today.

Indeed, it appears to be barely scratching the surface of its long-term market opportunity.

Yet, analysts have a consensus 12-month price target of just $24, where it’s at now. Only 13 of 26 analysts rate it a buy.

Therefore, I think Wall Street could be severely underestimating this growth stock. So I’ve promoted it to my own buy list.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ben McPoland has positions in Shopify. The Motley Fool UK has recommended Shopify and Toast. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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