RBC Capital Markets initiated coverage of Toast, Inc. (TOST) on Wednesday, assigning the stock a ‘Sector Perform’ rating and a $19 price target. Analysts at RBC Capital said they believe the company is uniquely positioned to penetrate the large restaurant technology and payments market, while driving ARR growth through software penetration.
“Given that the restaurant industry operates with low margins, high employee turnover, and perishable products, coupled with changing customer preferences, we believe that Toast is positioned to benefit from the secular shift toward restaurant digitalization. We believe Toast can capture an incremental 3ppt of share, to ~18% of the ~645K US SMB and mid-market restaurants through FY24,” analysts wrote in a client note.
Increasing software penetration is expected to sustain high ARR growth in FY24 and FY25 at 31% y/y and 26% y/y, respectively. This is due to investments and upselling customers, new features that help optimize the cost base for restaurants, and upmarket movement to larger customers.
At the same time, they recognize that the stock is trading at a premium relative to peers. The shares are currently trading at ~30.5x CY25e EV/adj. EBITDA, while its nearest competitors are trading at an average of ~23x, they said.
“[Toast] needs to demonstrate an ability to reaccelerate revenue growth, particularly its SaaS ARPU, which is a key proof-point in the company’s profitable growth algorithm, to meaningfully expand its multiple from current levels,” added the analysts.
Toast stock is trading hands at $18.10 Wednesday afternoon, down 1.84%.