A previous version of this report incorrectly referred to Toast’s volume numbers instead of its revenue. It has been corrected.
Toast Inc. could be rolling in dough as the maker of restaurant-focused payment software heads for the public markets.
The financial technology company sees a big opportunity to simplify the antiquated and multifaceted process of managing restaurant operations, especially for establishments that still rely heavily on paper solutions or use various systems that don’t connect with one another. Toast TOST is set be valued at about $ 20 billion, after reportedly pricing its initial public offering at $ 40 a share, well above its expected range of $ 34 to $ 36 apiece.
Among Toast’s competitors is Square Inc. SQ, +0.43%, which itself has seen strong success with its offering that aims to provide pricing transparency, a modern interface, and interoperable solutions for small businesses. Square’s customer base includes restaurants and coffeeshops as well as other kinds of retailers, but analysts see Toast as well-positioned with its focused offering.
The company intends to offer 21.74 million class A shares through its IPO. Toast will raise about $ 868 million, and plans to list on the New York Stock Exchange under the ticker TOST.
Here are five things to know about Toast ahead of the offering.
A fragmented market
Toast is betting that it continues to win restaurant customers by offering a portfolio of easy-to-use, modern technology solutions that work well with one another.
“Despite how large the industry is, restaurants often lag behind other industries in transitioning to modern, cloud-based platforms,” founders Aman Narang, Steve Fredette, and Jonathan Grimm said in a letter in the company’s prospectus. Their early conversations with restaurants found that many owners were frustrated by legacy systems that didn’t play nicely together and that the industry was “lacking a true technology leader,” something Toast hopes to be with its restaurant-focused product.
“The technology has the ability to work well for independent chains and ‘mom-and-pop’ concepts as well as the scalability for larger regional, national and global branded concepts,” MKM Partners analyst Rohit Kulkarni wrote in a note to clients.
Toast cites statistics indicating there are about 860,000 restaurant locations in the U.S. and that these businesses spent roughly $ 25 billion combined on technology in 2019. The company anticipates that this spending could rise to $ 55 billion by 2024.
Restaurants were hit hard by the pandemic, but they also became more motivated to upgrade their technology in order to better support online ordering, contactless payments, and other trends that became more popular during the COVID-19 crisis, according to Toast.
The opportunity ahead
Toast outlines a number of growth strategies, including geographic expansion.
“We believe that there are significant opportunities to further increase our revenue by expanding internationally,” the company said in its prospectus, though it conceded that such expansion would introduce Toast to new, local competitors.
“Given the fierce competition in the U.S. integrated PoS market, Toast will likely need to expand beyond its core markets (e.g., to larger enterprises, other verticals, international) to maintain the strong growth trajectory it has enjoyed to date,” MoffettNathanson analyst Lisa Ellis wrote in a note to clients.
Toast also sees room to sell its existing customers more services. Customers “increasingly” have been adopting Toast’s “full suite of products,” per the prospectus, but the company listed among its business risks that it isn’t sure whether customers will continue signing up for this wider package at current rates. Another goal for the company is getting existing customers to deploy Toast technology across all locations, since some clients start with only a subset.
Growing revenues, widening losses
The company generated $ 704 million in revenue during the first six months of 2021, up from $ 344 million in the first six months of 2020. Toast brings in revenue through several sources, including subscription offerings, fintech offerings like payments, hardware, and professional services.
The company lost $ 235 million in the first six months of 2021, whereas it lost $ 125 million in the first six months of 2020.
Get paid
Toast acknowledges the unpredictability of payments revenue in discussing the potential risks to its business.
The company generates payments revenue both as a percentage of volume and through a flat fee, so its revenue here depends on how much volume a restaurant sends through Toast’s platform.
“This amount may vary, depending on, among other things, the success of our customers’ restaurant locations, the proportion of our customers’ payment volumes processed through our platform, ticket size, consumer spending levels in general, and overall economic conditions,” the company said in its prospectus.
Further, the company tends to generate more revenue when people use debit cards or engage in online spending. These were two popular ways to pay during the pandemic as people flocked to less risky payment methods and avoided leaving their homes as much, but Toast anticipates that credit and card-present transactions will increase on a relative basis going forward.
The other kind of takeout
Forget restaurant takeout. Toast itself might be a takeout candidate, according to Bernstein analyst Harshita Rawat.
She sees the company as a possible fit for PayPal Holdings Inc. PYPL, -0.16%, which has been looking to gain a foothold in the world of physical commerce. “In-store spend has been the Achilles Heel for PayPal for many years, and its five or so attempts so far have not yield material results,” she wrote.
Toast also might be an “attractive candidate” for Dutch payments powerhouse Adyen NV ADYEN, -0.17%, she continued, “although Adyen has pursued an organic strategy so far.”
On the other hand, Rawat thinks that Toast could assume the role of the “consolidator” among restaurant-technology players by scooping up smaller and focuses software companies.