As of this writing, shares of Toast (NYSE: TOST) are up 22% this year alone. That gain crushes the broader Nasdaq Composite‘s 6% rise. Perhaps investors are starting to appreciate the favorable qualities that this restaurant software and service provider possesses.
This unstoppable growth stock is starting to heat up. But it remains 66% below its peak price, a high that was established in November 2021. Should you buy Toast shares and hold them forever?
Toast provides another example of how a business can use data, technology, and the internet to serve an otherwise boring and slow-moving industry. It serves the restaurant sector with cloud-based tools that help owners and operators better handle their operations.
Of the 860,000 restaurant locations in the U.S., this company counts 106,000 as its customers, representing a sizable chunk of the industry. Toast has proven historically that it can introduce compelling new products and features to satisfy existing customers and add new ones. Most recently, the company released Restaurant Management Suite, which provides data, integration, and other tools for larger customers.
Offering a wide range of these services likely means that Toast benefits from switching costs. Once a restaurant owner and staff get onboarded to Toast’s platform, familiarizing themselves with the software that gets integrated into the operations, I’d argue that the chances they’ll switch to a competitor are slim. Changing service providers would cause disruptions that are best avoided.
Another competitive advantage that Toast might have comes from the data it’s able to collect from all of its restaurant customers. That can include valuable insights like what types of cuisine are most popular, what hours of the day patrons like to visit frequently, or whether in-person or online ordering is seeing the most activity. This can inform product and marketing decisions.
Toast isn’t lacking in the growth department, either. The business reported $3.9 billion of sales in 2023. That was up from $665 million just four years ago. Toast benefits from the restaurant industry’s increased spending on technology.
Adding excitement to the equation for investors is Toast’s valuation. The stock trades at a price-to-sales ratio of 3.1. That’s well below its historical average, which indicates somewhat cautious optimism about the business.
Wall Street analysts’ consensus estimates think Toast can increase its revenue by 22% per year between 2023 and 2026. And they believe the company will start to generate positive earnings starting this year. These are encouraging signs that might persuade investors on the sidelines to take a bite out of the stock.
The great Warren Buffett has said before that his favorable holding period is forever. Very few companies can fit this description, given that the Oracle of Omaha thinks only the highest-quality stocks can qualify. The thinking is that these businesses can continue rewarding their investors over an extremely long time period.
Toast possesses notable competitive advantages that can’t be ignored. And these could help Toast become a much larger and extremely profitable enterprise down the road. This would certainly lead to a significantly higher stock price for shareholders.
That’s a bullish outcome I do think has a good shot at actually happening. But to be clear, I don’t think Toast is a forever holding. The industry landscape is far from being established, and Toast faces competition from formidable opponents like Block, Clover, and PAR Technology. Toast will have its work cut out for it, adding some uncertainty to the mix.
While it’s not a forever stock in my book, I still believe investors should consider buying shares today while they’re well off their all-time high.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Block and Toast. The Motley Fool has a disclosure policy.
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