TOST Stock Rises 19% in Three Months: Time to Hold or Make an Exit?

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Toast, Inc. TOST shares have gained 19.2% in the past three months, outperforming the Internet Software market and the Zacks Computer & Technology sector's growth of 12.5% and 9.7%, respectively. The S&P 500 Composite has returned 5.3% over the same time frame. TOST is one of the leading providers of software-as-a-service (SaaS) and hardware solutions focused on the restaurant market.
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TOST declined 2.4% last day and closed the session at $41.54, close to its 52-week high of $45.56. While the recent momentum may seem encouraging, let's take a closer look at the company's pros and cons to ascertain whether investors hold the stock or exit the investment.
Heightened uncertainty prevailing over the macro environment amid escalating trade war, with tariff troubles raising fears of increased costs and dampening consumer purchasing power, remains a concern. Higher tariffs can lead to a reduction in profit for the average independent restaurant operator.
Management highlighted that it was closely monitoring the macro environment and emphasized restaurants' ability to navigate macro challenges. Despite Toast's confidence, the restaurant industry is still highly sensitive to consumer spending, labor inflation and supply chain volatility. A consumer downturn or cost pressures could reduce restaurant spend on technology, thereby impacting TOST's performance.
Toast, Inc. price-consensus-eps-surprise-chart | Toast, Inc. Quote
Decline in Gross Payment Volume or GPV per location is another problem, as it implies lower average transaction volumes. TOST's overall GPV surged 22% year over year to $42 billion in the first quarter, but GPV per location declined 3% year over year. TOST added that it expects GPV per location to remain down in a similar range in the current quarter.
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Higher costs can weigh on profitability. In the last reported quarter, operating expenses, excluding bad debt and credit-related expenses, increased 12%. Sales & marketing expenses grew 25% year over year due to higher headcount and brand marketing investments across core, retail and international segments. Higher costs can prove a drag on margins, especially if revenue growth does not keep pace.
Although Toast emphasized progress in the international, retail and enterprise verticals, the investment in these nascent areas could take time to scale and may drag on margins in the near term if costs outpace revenue contribution.
TOST needs to watch out for the competitive pressure from various small and big players who are also vying for a larger share of this lucrative market. Block XYZ, Oracle ORCL, and Lightspeed LSPD compete in varying degrees with Toast, though each company approaches the market differently.
Tech behemoth Oracle offers a wide range of products, including POS systems like Oracle Retail Xstore and Oracle MICROS Simphony POS. MICROS Simphony targets large restaurant chains, hotels, casinos, and resorts. Lightspeed provides a one-stop commerce platform for merchants and serves retail, hospitality and golf businesses. It offers a cloud solution that transforms and combines online and physical operations, multichannel sales and aids in expansion to new locations. It also facilitates global payments, financing and connection to supplier networks. Block, formerly known as Square, offers financial and marketing services through its comprehensive commerce ecosystem that helps sellers to start, run and grow their businesses. Block's Square for Restaurants POS platform competes directly with TOST's offerings.
TOST stock is also not so cheap, as its Value Style Score of F suggests a stretched valuation at this moment.
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TOST is quite expensive, with the stock trading at a premium with a price/book multiple of 12.35X compared with the industry's 6.26X.
Toast faces several challenges, like an uncertain macro environment, competitive threats and stretched valuation. These concerns suggest that the recent rally over the past three months provides a strategic opportunity to exit before macroeconomic headwinds or company-specific issues wipe out returns.
With a Zacks Rank #4 (Sell), investors would be better off if they offloaded this stock from their portfolios.
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
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This article originally published on Zacks Investment Research (zacks.com).
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