After a troubling start to the year, the market has bounced back remarkably. Some companies in particular have benefited tremendously from the renewed sense of optimism.
As of May 27, this growth stock has soared 41% in the past seven weeks. At the same time, the Nasdaq Composite index has climbed 25%. There are undoubtedly a few reasons for investors to get excited about this business.
Should you buy shares in June and hold them forever?
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Strong growth
Some companies are struggling amid the uncertain economic environment, but Toast (TOST 0.28%) keeps putting up strong growth, with revenue jumping 24.4% in Q1 (ended March 31) on a year-over-year basis. The cloud-based and restaurant-focused hardware and software provider added 6,000 net new customers during the quarter.
Toast’s growth thus far, especially the momentum that’s carried over into 2025, is certainly impressive. It points to robust demand for its products and services and perhaps the peace of mind it gives customers. That’s encouraging.
However, a business like Toast, which caters to an economically sensitive part of the economy, the restaurant sector, can be exposed to macro forces beyond its control. Restaurants open and close all the time. In a possible recession, which experts believe is still on the table this year, it’s possible that some of Toast’s customers see falling demand or even go out of business. This will hurt sales.
On a positive note, this company is profitable on a generally accepted accounting principles (GAAP) basis. Net income totaled $56 million in Q1, a major reversal from an $83 million net loss in the year-ago period.
Consensus analyst estimates call for earnings per share to increase at a compound annual rate of 42.4% between 2024 and 2027. It’s best to take these predictions with a grain of salt, but that outlook can add to the bullishness.
Competitive landscape
Toast’s success deserves credit. But investors need to understand the industry backdrop. There are some formidable competitors, like Block‘s Square, Fiserv‘s Clover, and Lightspeed. Since 20% of new customers come from referrals, Toast is doing a great job. However, these competitors have the financial resources and tech know-how to make the next five years more difficult for Toast than the last five.
There is notable competition that should keep Toast’s management team and shareholders on alert. However, this business has carved out a successful position in the industry, as showcased by having 140,000 restaurant locations as its customer base.
Even more impressive, it was announced recently that Toast signed Applebee’s, owned by Dine Brands Global, as a customer — the company’s largest deal ever. Toast also added Topgolf locations of Topgolf Callaway Brands to its customer roster.
Toast’s scale likely means the company has now developed an economic moat. Software enterprises like this one typically benefit from switching costs as their customers sign up for, train employees on, and become dependent on the products and services. And because Toast also processes payments, it’s able to collect proprietary data that can be used to provide invaluable insights to customers.
Bullish sentiment adds to Toast’s downside
Since the start of 2024, shares of Toast have soared 136%. There’s a lot of bullish momentum among the investment community, which makes sense, given the fundamental strength of the underlying business.
The shares, therefore, aren’t that cheap. As of May 27, they trade at a price-to-sales ratio of 5.1. That’s close to the most expensive they’ve been in the past three years.
This adds downside risk should the business report financial results that disappoint Wall Street. However, investors who remain convinced that Toast will be a massive winner should consider dollar-cost-averaging into the stock starting in June. It’s impossible to say that a company can be a forever holding before buying shares, so it’s critical to continue monitoring financial performance over the long term.
Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Block and Toast. The Motley Fool recommends Topgolf Callaway Brands. The Motley Fool has a disclosure policy.
