Best stocks: This software name is a category killer and has broken out

CNBC

15-05-2025

(This is The Best Stocks in the Market , brought to you by Josh Brown and Sean Russo of Ritholtz Wealth Management.) Josh: Today we're spotlighting a stock you've probably heard me talking about on CNBC over the past few years, Toast (TOST) . For the first time ever, Toast has hit our list of the Best Stocks in the Market . Sean was really excited to write this one up and I was excited to read his take on the fundamental story. My take is very simple — I believe this company has reached the point where it is an established, acknowledged category killer. I love catching stories like these in the earlier stages, before everyone figures out the dominant player is going to have advantages that become cumulative. This is where the Toast story is now. The more penetration they get into a given metropolitan area, the more local service industry workers (and their employers) are comfortable using the software within their counter service or restaurant business. Toast becomes the de facto default option for point-of-sale payment systems. Everyone is trained on it and it becomes entrenched. Once Toast gets to a certain threshold within these markets, it's a wrap. They are then able to knock down the rest of local players and the sales cycle gets shorter and easier. Next they can sell all sorts of horizontal software solutions to the same population of customers — food ordering, staff tracking, payroll, etc. Writing about the company's most recent quarterly report last week, Mizuho analyst Dan Dolev cited the company's ability to defy the "difficult environment" for restaurants and relay strong guidance while giants McDonalds, Sweetgreen and Chipotle were posting warnings. Dan was bullish about Toast's increased take rate as well — they kept 48 basis points of all transaction revenue on their platform (1 basis point equals 0.01%). He sees even more opportunity on this front as contracts with customer-restaurants are renegotiated. I originally put this position on for myself as a trade a long time ago but the more I saw these guys execute, the more I wanted to stay. Now I consider myself a long-term investor in the name. Best Stock Spotlight: Toast Inc (TOST) On the list since: May 13th, 2025 Sean: TOST is a digital platform for 140,000-plus restaurants, generating revenue from subscription fees and transaction fees. Unlike its competitors, Toast intermediates every payment transaction on its platform; it processed more than $150 billion in gross platform volume in 2024. TOST is digitizing the fragmented and highly competitive restaurant industry, and the stock is breaking out. TOST just broke out above its November 2024 high of $43. TOST hasn't traded above the $45 mark since November of 2021. Similar to Monday's Best Stocks in the Market piece on Carvana, TOST has spent a lot of time below all time highs. TOST has been a public company since September of 2021, equal to 916 trading days. Of those 916 trading days, TOST saw an all time high on just 3 of them, and the first 2 all-time highs came on the first and second day of trading. It's last all time high occurred on November 3rd of 2021 — 885 days ago. TOST's all-time low came in May of 2022 in the midst of the hottest run of inflation prints the market had seen since the early 80s. Investors priced in a reduction of restaurant spending by consumers because of this inflation. A recession became the base case for nearly 100% of economists. Those economists were wrong, and we saw the hottest spending trends come into the service category. In 2023, consumer spending on food away from home increased to $1.5 trillion, up from $1.3 trillion in 2022, marking a significant shift as dining out expenditures surpassed grocery spending. TOST is up 254% off its 2022 low. TOST hit $43 in November as the animal spirits about the U.S. economy came roaring into the headlines. From that November level, TOST hit a low of $30 on April 8th, down 30% from November, again reflecting worries about the U.S. consumer and their ability to spend with an ongoing trade war. Again, we're seeing economists throw the recession word around. And again, TOST is shrugging off those worries. High-growth stock TOST is a high-growth business. It has compounded its top line revenue by 48% annually going back to 2020. Their profitability is growing too. Looking at its operating margin from Q4 of 2023 through Q1 of 2025, its gone from -4.1% to 3.7%, growing profitability by 780 basis points. Part of the reason why TOST landed on our list is the outstanding earnings call it just reported. TOST delivered record Q1 2025 results with 31% annual recurring revenue growth, 22% gross payment volume growth, and profitability driven by strong customer spending and massive enterprise wins. TOST added 6,000 net new locations bringing the total to 140,000 locations, which is a 25% YoY increase. Toast's profitability margins have improved significantly. Gross profit margin increased from 20.5% in Q4 2022 to 25.9% in Q1 2025. Operating margin turned positive, going from -12.9% to 3.2%. Net profit margins improved from -12.9% to 4.19%, and EBITDA margin grew from -12.1% to 10.0% over the same period. (data via QUARTR) TOST also reported a partnership with Applebee's, which represents the company's largest deal to date. The enterprise pipeline is described as the strongest it has ever been for TOST, with ongoing conversations with other large brands. The economics of these enterprise deals are super beneficial for TOST, with large value-add ARR opportunities and lower churn rates for larger customers. TOST reported these numbers on May 8, and the stock was up 11.4% the next day. From April 8th through 5/14 the stock is up 50%. The market is pricing in this growth, and the stock is in breakout mode. Risk Management Josh: My instinct here is the stock pulls back and retests the recent breakout. If the volume is light and the buyers come in to defend that gap ($39.75), that becomes the new support and we could be off to the races. If Toast gets back into the gap and fills it, you're back in the $35-$37 range, coincidentally the rising 200-day is there to cushion the fall as well (see below). Toast has been a volatile stock as investors doubted the company's commitment to reaching consistent profitability. Now those doubts are fading away and my hope would be that the volatility can fade with them. DISCLOSURES: Josh owns the stock All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . 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