On Friday, Wells Fargo adjusted its outlook on Toast Inc. (NYSE:TOST), increasing the company's price target to $17 from $15, while keeping an Underweight rating on the stock. The firm's analysis followed a review of Toast's fiscal year 2024 guidance, which presented a combination of lower-than-expected growth projections and higher EBITDA forecasts.
Toast's FY24 guidance indicated a midpoint for recurring gross profit (GP) growth at 24%, a figure below the previous expectation of 29%. However, this was counterbalanced by a more optimistic EBITDA guidance of $210 million, significantly higher than the earlier $170 million estimate. Additionally, the company anticipates a year-over-year increase in net new locations.
Investor sentiment seemed to lean positively towards the company's outlook, with some suggesting that the conservative growth estimates could lead to better-than-expected profitability due to operating leverage gains after restructuring. Wells Fargo's assessment focused on three key growth drivers for Toast in 2024: the number of net new locations, gross payment volume (GPV) per location, and software-as-a-service (SaaS) average revenue per user (ARPU).
Despite the potential for each key performance indicator to exceed expectations individually, Wells Fargo expressed difficulty in foreseeing all three simultaneously outperforming, especially considering the trend towards smaller average location sizes. The firm pointed out that recurring GP per location showed a slowdown to low single-digit year-over-year growth in the second half of 2023, and the company's guidance implied a contraction of 2-4% year-over-year.
The raised EBITDA expectations set a higher bar for upside surprises. With the consensus estimate on Wall Street already at $220 million, near the upper limit of Toast's guidance, and buy-side expectations around $250 million, the potential for positive surprises seems challenging. Wells
Fargo also noted the company's international and enterprise ambitions and increasing competition, which could imply sustained investment demands.
In conclusion, while there is a belief that Toast will begin to reach its 'at scale' margin profile by 2026, with estimates of a 9% margin compared to the previously guided figure of over 10%, the current analysis suggests that achieving these targets may be more demanding than anticipated.
InvestingPro Insights
As we delve into the financial health and market performance of Toast Inc. (NYSE:TOST), a closer look at the data provided by InvestingPro reveals a nuanced picture. With a market capitalization of $13.46 billion, Toast's presence in the market is significant, and its revenue growth is robust, with a notable increase of 41.52% in the last twelve months as of Q4 2023. This is complemented by a quarterly revenue growth of 34.9% in Q1 2023, signaling a strong upward trajectory.
InvestingPro Tips highlight that while Toast is expected to see net income growth this year, the company is currently grappling with weak gross profit margins of 21.71%. Additionally, the stock's price movements have been quite volatile, which could be a point of consideration for investors looking for stability. On a more positive note, Toast's liquid assets have surpassed its short-term obligations, suggesting a solid liquidity position.
Despite not being profitable over the last twelve months, analysts are optimistic, predicting profitability for the company in the current year. This optimism is reflected in the stock's strong return over the last three months, with a price total return of 29.08%. However, investors should note that Toast does not pay a dividend, which could be a factor for those seeking regular income from their investments.
For those interested in a deeper analysis, InvestingPro offers additional tips on Toast Inc., which can be explored further at https://www.investing.com/pro/TOST. To enhance your investment research, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. There are 9 more InvestingPro Tips available that could provide valuable insights into Toast's financial and market performance.
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