1 Growth Stock Down 59% to Buy Right Now

1 Growth Stock Down 59% to Buy Right Now

If you look hard enough, you can always find quality companies to buy. Grill (NYSE:TOST) in particular, it just released financial results that the market welcomed, with shares jumping 13% immediately following the announcement.

If we dig a little deeper, there’s a lot to like about this company and the direction it’s heading in, even if the growth stocks is down 58% from its all-time high. Here’s why it’s still a smart buy right now.

Enter a massive industry

At high level, Grill meets the specific needs of restaurants. This means providing hardware and software solutions to manage things like payment processing, omnichannel ordering, loyalty programs, employee payroll and accounting. Toast is essentially a leading provider of operating systems for owners and operators, with the goal of making running a restaurant as seamless as possible.

The good news is that the opportunity for Toast is truly huge. There are a total of 860,000 restaurants in the United States, of which 112,000 are already customers of the company. This figure increased by 32% year over year. While the company can make considerable progress in international markets, the runway for expansion is even larger, as there are 22 million restaurants worldwide.

Revenue increased 31% in the first quarter, totaling $1.1 billion. That was better than Wall Street consensus analysts’ expectations. Just three years ago, Toast reported $282 million in revenue in the first quarter of 2021, so it’s clear the company is catching up with restaurants.

Management’s goal is to generate greater recurring revenue, from things like subscriptions and payments, to add more stability and predictability to operations. On an annualized basis, this segment generated $1.3 billion in sales, 32% more than in the first quarter of 2023.

Access the essentials

Toast’s growth is nothing short of impressive, especially considering the uncertain economic environment we find ourselves in. However, the company leaves a lot to be desired when it comes to financial results. In the most recent quarter, Toast reported a net loss of $83 million, roughly in line with the same period last year.

I’m generally skeptical of businesses that don’t generate consistent profits. In my opinion, this adds a lot of risk for investors because it demonstrates that the business model has not yet proven itself. Additionally, it is always difficult to predict exactly when a net positive result will be achieved.

I’m willing to give Toast the benefit of the doubt, though. The reason is that the company is developing a economic gap this comes from the fact that its customers have high switching costs.

Put yourself in the shoes of a restaurateur. You, your team and your customers are all very familiar with Toast’s offerings. Things are going well and there have been no problems.

In this scenario, you are probably not going to opt for a competitor’s products and services, even if they are cheaper. Imagine the complicated process of transitioning to Toast while integrating a new system. This seems like a daunting task.

This gives me confidence in the sustainability of Toast, especially since its customer base remains somewhat locked in. Therefore, as revenue continues to grow at a rapid pace, the hope is that the company can eventually start generating outsized profits.

A lot of advantages

The market is not asking investors to pay for Toast. The shares are trading at a price/sales ratio of 3.5, which is well below the historical average multiple of 4.7.

Given the moat I just discussed, coupled with a huge growth opportunity, Toast stock appears to offer plenty of upside for long-term investors.

Should you invest $1,000 in Toast right now?

Before buying Toast stock, consider this:

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Neil Patel and its clients have no position in any of the stocks mentioned. The Motley Fool posts and recommends Toast. The Motley Fool has a disclosure policy.

1 Growth Stock Down 59% to Buy Now was originally published by The Motley Fool

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