Key points
- Counter Global's Sean Barrett says Toast trades near $22 to $23 a share against his $50 fair value, with 15% of Counter's portfolio in the stock.
- Barrett argues Toast's 49 basis point net take rate is under-monetised against the 75 to 125 basis points competitors earn, leaving room for payments upside.
- Barrett says Toast's margins rose from -16% in 2022 to about 35%, with R&D barely growing while the business doubled in size.
Why Toast looks cheap amid the software sell-off
Counter Global's Sean Barrett makes the case for Toast as a profitable, durable compounder that trades at a deep discount despite the software sell-off. The company keeps taking restaurant share while earning less per payment than rivals, and vertical software leaders stand to benefit from AI.
Takeaways
- Toast has become a profitable recurring compounder. Enterprise value is about $12bn against roughly $2bn of recurring gross profit, 35% EBITDA margins and minimal capex. Margins were -16% in 2022. About two-thirds of gross profit is payments, which are more volatile than contracts but track inflation and GDP.
- Toast wins about half of new restaurant openings. Toast holds about 20% of US restaurants with more than 160,000 locations, up from 20,000 to 30,000 in 2020. Product-led growth and network effects drive the share gains, and the industry's 15% annual churn feeds a steady stream of new openings.
- Payments take rate looks under-monetised. On a $100 dinner order about $2.50 goes to interchange and Toast keeps around 50 cents, a 49 basis point net take rate against 75 to 125 for competitors. Software adds $300 to $500 a month, and hardware is a loss leader.
- AI helps vertical category killers like Toast. Barrett accepts AI is disrupting coding and DevOps but says vertical leaders gain. In 2015 AWS-driven open source pushed multiples to three or four times revenue before category killers rallied by early 2016. About half of Toast customers use Toast IQ weekly.
- New products widen the addressable market. Toast went from one market to five, adding enterprise, grocery, liquor, gas stations and hotels, plus the UK, Ireland, Australia and Canada. Barrett says its US addressable market now exceeds restaurants alone, and he sees about 15m locations globally outside China.
- Competitors and DoorDash pose limited threat. Legacy systems hold about half the market, Clover about 15% under an over-levered Fiserv, and Square 5% to 10%. A survey of San Francisco restaurants found none willing to switch to DoorDash. Churn has not visibly risen, which Barrett attributes to survivorship bias.
- Barrett sees fair value near $50 a share. Toast trades at 18 times 2027 GAAP earnings at $22 to $23 a share. Barrett expects gross profit above $10bn and net income above $3bn over ten years, with margins heading toward 40%. Risks are macro exposure, churn, price sensitivity and competition.