Investors Burned by Toast’s Fourth-Quarter Results, With Margin Pressure Taking Center Stage

Toast shares tumbled roughly 20% in intraday trading after the company missed the Street’s profitability estimates for its fourth quarter. Our take on results is less than sanguine—we anticipate lowering our $25.50 fair value estimate by a midteens percentage on soft margin guidance—but it is a bit more optimistic than the market’s reaction, given our already frosty view of the restaurant industry’s near-term prospects. We also plan to move our Morningstar Uncertainty Rating to Very High from High, consistent with our quantitative methodology.

Fourth-quarter results were mixed, with sales reaching $769 million, ahead of our $753 million estimate, but a diluted EPS loss of $0.19 missing our $0.16 loss forecast. With immediate-term profitability remaining the market’s principal concern for high-growth tech names, the trading reaction is unsurprising to us. We isolate guidance for 30%-35% long-term EBITDA margin as a percentage of software and fintech gross profit (behind our prior 40% estimate) as the key catalyst for our own valuation haircut, leading us to pull down our long-term operating profit margin estimate to 11.9% in 2032 from the midteens.

On a positive note, growth was driven by an impressive 5,000 net restaurant adds (with 79,000 Toast restaurants representing nearly 39% growth from a year ago) as inflation and thin margins drew in operators looking to improve efficiency. We expect Toast to continue to expand its suite of hardware and software offerings, a view evidenced by its announced acquisition of Delphi Display Systems, which specializes in digital drive-thru technology. The move strikes us as prudent and should serve to increase switching costs—the source of Toast’s narrow moat—with partner restaurants. In the long term, we view $15,000 in software revenue per unit across Toast’s suite as attainable, representing roughly 1% of restaurant sales.