What Would It Take for Investors to Pay More for Toast Stock?
Key Points
Toast is posting very strong sales and earnings growth, but the stock is still down nearly 11% year to date.
Continuing to establish a strong performance track record and branching into new categories could spur big gains for the stock.
Toast (NYSE: TOST) is a provider of digital payments and management software services for restaurants and other businesses. The company grew its revenue by roughly 23% year over year to $1.91 billion last quarter, and net income surged 92.5% to roughly $154 million.
Despite very strong sales and earnings expansion, investors have seemingly been hesitant to pay a valuation premium to own a piece of Toast's growth story. With the stock trading at roughly 20 times 2026's expected earnings, shares could actually be significantly underpriced compared to the rate at which the business is growing its profits.
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What would have to happen for investors to pay more for Toast stock?
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A combination of consistency and new growth wins could power gains for Toast
Toast's recent business performance suggests the company may not need to do anything radically different for its stock to eventually see substantial gains. While the stock is still down roughly 11% through 2026's trading, the company's second-quarter report, published at the beginning of August, helped drive strong gains in its share price.
Toast has continued to bring customers on board at an encouraging pace, with roughly 9,500 new customer locations added in the second quarter. The business also closed out the quarter with annualized recurring revenue of roughly $2.4 billion -- representing an increase of roughly 25% year over year.
The fintech specialist's core growth engine continues to look quite strong. Payment services continue to be the hook that brings most customers on board, but the company is also converting clients who use its payment tech into subscription-based business management software -- which has even higher margins.
While Toast's heavy focus on the restaurant industry may be causing some concern among investors, given the industry's historically high sensitivity to macroeconomic pressures, the company should be able to command higher valuation multiples if growth in its core market continues to be impressive.
In addition to the restaurant space, Toast is also expanding into other markets. With its Q2 report, the company introduced its payment services to gas stations. At the time of the company's Q2 report and conference call, it had only rolled out service to two gas-station customers -- but initiatives along these lines could be a substantial boon to Toast and its stock.
For starters, expanding into categories outside the restaurant industry will provide new revenue streams. Winning customers in new industries will also diversify the company's sales streams and help provide some fortification against macroeconomic pressures that can be particularly hard on the restaurant industry.
Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Toast. The Motley Fool recommends the following options: long January 2028 $15 calls on Toast. The Motley Fool has a disclosure policy.