Toast Inc., trading under the ticker TOST and recorded a recent decrease of 1.80%, presents a unique opportunity by specifically catering to the restaurant industry, setting it apart from broader fintech platforms like Block’s Square. However, the company faces distinct challenges that potential investors should consider.
### 1. Competition in the Payments Sector
Toast offers a competitive edge by focusing on restaurant-related businesses, appealing to entities such as breweries, food trucks, and hotels. This versatility makes it an attractive option. However, Square also provides customizable solutions, including restaurant-specific offerings, within its broader ecosystem. Some businesses might prefer to stay within Square’s ecosystem despite the specialized focus of Toast, which poses competitive challenges for Toast’s fintech position.
### 2. Characteristics of the Restaurant Industry
The restaurant industry’s diversity, including everything from large chains like McDonald’s to small family-owned operations, is both an advantage and a challenge for Toast. The sector is plagued by high turnover, with only a 20% long-term success rate according to the National Restaurant Association. Despite these challenges, Toast’s customer base grew by 29% to approximately 120,000 by the end of the second quarter (June 30), and the company achieved profitability with $14 million in earnings. Though attractive with a price-to-sales ratio just under 4, high client turnover could affect future customer growth, potentially impacting Toast’s market valuation.
### 3. Macroeconomic Factors
Economic conditions further complicate Toast’s prospects. The restaurant industry has contracted significantly post-pandemic, with about 749,000 operational restaurants in the U.S., down from 1 million pre-pandemic. Inflation has also driven menu prices up by 27% since early 2020, impacting consumer dining habits. Toast serves about 16% of the U.S. market, yet growth is challenged by a shrinking industry. While Toast has expanded into international markets like Canada, Ireland, and the U.K., cultural differences may pose expansion hurdles, making it difficult to predict growth potential without a clearer strategy.
### Investment Risks
Toast remains attractive due to its specialized focus and growing customer base. However, investors should remain cautious due to its competition, the high turnover in its target industry, and macroeconomic challenges. International expansion could sustain its growth rate, but its success outside the U.S. is uncertain. Overall, Toast’s offerings provide clear benefits to its clients, yet its investment appeal is less certain amidst these challenges.
