Toast Stock: Why You Shouldn’t Buy Right After the IPO

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Toast stock now trades on the New York Stock Exchange. You can find it under the Toast stock ticker “TOST.”

Toast Inc. (NYSE: TOST) had the restaurant industry hostage early in the pandemic. Restaurants needed safe solutions for selling food during lockdowns, fast. And the industry flocked to Toast, which would then give them the touch-free and delivery tech solutions to stay alive.

Many believe this company will continue thriving, as restaurants suddenly don’t want to abandon their drive-thru-only business models.

This spells excitement for Toast stock – but it does not mean the stock is a buy right away.

Exciting IPOs tend to have an unreasonable bump in their first days of trading. We’ll tell you how to play this one.

First, here’s a little on the IPO that just happened…

Toast IPO Details

The Toast IPO sold shares at $40 and valued the company at $20 billion. The current value is up from $8 billion in 2020, so it’s more than doubled.

The IPO price beat the top of its expected range of $34 to $36.

This unicorn startup is known for selling technology to restaurants. It’s already demonstrated it can make it in a pandemic.

The company’s sales crashed 80% at first in 2020. But they swiftly rallied to normal once demand for the technology became apparent.

Part of the rally involved cutting its workforce in half, showing management’s ability to think fast. But mostly, restaurants just needed help transitioning to more touchless delivery and drive-thru formats.

This is a fast-growing company that’s seen a lot of early buying. Today, Toast serves more than 48,000 restaurant locations, up from 27,000 in 2019.

Now that the company is both in control and in demand, this was a timely IPO. Let’s find out more about what this company does before buying, though…

What Is Toast?

For all the talk you hear about restaurants, Toast is fundamentally a technology company based in Massachusetts.

The company started out vending cloud-based software to restaurants around the country, assisting them with digital point-of-sale (POS) systems and delivery apps.

Over the years, it has expanded into a full restaurant technology platform, adding gift cards, analytics, and much else.

Fun fact: Toast does not have many annually recurring subscription agreements with its customers. Instead, most of its revenue comes from the cut it gets out of each transaction on its financial technology solutions.

Whether that’s better or worse than annually recurring revenue, only time will tell. But here’s the story so far on Toast’s financial numbers.

Is Toast Profitable?

Toast is not profitable. In fact, the company is significantly in the red. Its year-end loss for 2020 was $248 million, as shown on the company’s prospectus.

The first six months of 2021 show a loss of $124 million, and the company is on pace to finish this year about the same as last.

Still, Toast has managed to increase subscriptions, raising its Services revenue from $62 million to $101 million, a 62% increase from the year prior.

The consistent net loss year-to-year is no surprise when you see how much the company spends on research and development. In the first six months of 2021, it spent $26 million on R&D, up from $2.2 million in the same period last year.

That whopping 1,081% increase in spending will hurt any company’s bottom line.

Still, Toast continues to make new customers. And that’s likely the most important factor in determining whether this stock is a grower or not long term.

Finally, here’s whether you should buy Toast stock now that it’s publicly traded.

Should You Buy Toast Stock?

Toast closed its first full day of trading significantly higher than its IPO price of $40. It ended at $65.

That’s a typical early jolt we see in IPO stock prices. It can often be a red flag revealing the stock is overbought. And any investors looking to buy will want to wait until all the hype gets shaken out of the price before jumping in.

Still early in trading, we have already started to see some of that shake-out take place. The stock fell as low as $59 the second day. It will continue fighting until the market values the company appropriately.

We know that the stock’s real value will depend on future adoption by the restaurant industry and chipping away at the net loss over time. The latter seems to be happening, at least.

But an important thing to note is that Toast does not need restaurants to keep its dining rooms open to make money. It’s really the opposite. It wants restaurants to continue adapting their drive-thru and carry out models.

Now, restaurants are proceeding with drive-thru or carry-out-only models after finding they are more cost-efficient. That applies to nationwide chains as well as regional ones.

For example, the salad company Sweet Green has been testing “ghost kitchens” over the last year. These are nothing more than kitchens that deliver door to door – maybe carry out as well, but no drive thru.

Toast Inc. will depend on innovations like these to grow. And the future looks sunny.

Toast stock could see some upside over the next several years. But it’s not finished shaking loose the IPO craziness.

Wait a few weeks before buying.

One Stock to Buy Instead of Toast

Square Inc. (NYSE: SQ) is a fintech leader, and fintech is one of the hottest sectors around today. Square has a leg up on most of the competition in the payments slice of the fintech market.

Payments is where the big advances – and big bucks – figure to be.

Square is a favorite of mine because it’s all about technological transformation. It’s about peer-to-peer payments. The company’s mobile-payments platform is about helping individuals start and grow their businesses. Its Cash App service is going to be a one-stop shop for everything related to finance and e-commerce.

There’s an addressable market that’s huge – huge and growing, I’d add – with no ceiling in sight, just open blue skies.

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About the Author

Mike Stenger, Associate Editor for Money Morning at Money Map Press, graduated from the Perdue School of Business at Salisbury University. He has combined his degree in Economics with an interest in emerging technologies by finding where tech and finance overlap. Today, he studies the cybersecurity sector, AI, streaming, and the Cloud.

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