Restaurant software management provider Toast Inc. (TOST) in Boston went public last September. It offers a unified platform of software as a service (SaaS) products and financial technology solutions that provide restaurants with everything they need to operate their operations, point of sale, operations, digital ordering and delivery, marketing and loyalty, and staff management.

The stock plunged nearly 11% in price last week after the company released its latest quarterly earnings report. While the company reported $2 million in net income, it failed to meet investor expectations. The company highlighted various industry-wide challenges that restaurant operators encountered, including changing workforce dynamics, a protracted labor shortage, and increased input prices due to supply chain disruptions.

The stock has declined 57.1% in price over the past three months to close yesterday's trading session at $17.79. In addition, it is currently trading 74.6% below its all-time high of $69.93, which it hit on Nov. 02, 2021.

Click here to check out our Software Industry Report for 2022

Here's what could shape TOST's performance in the near term:

Inadequate Financials

TOST's revenue increased 110.7% year-over-year to $512 million for the fourth quarter, ended Dec. 31, 2021. Its operating expenses increased 81.7% from its year-ago value to $189 million. Its operating loss grew 103.5% from the prior-year quarter to $116 million. And the company's loss per share amounted to $0.23. In addition, its net cash used in operating activities came in at $32 million, representing a 14.3% increase over this period.

Weak Profitability

TOST's 18.7% trailing-12-months gross profit margin is 62.3% lower than the 49.6% industry average. Also, its ROA, ROC, and net income margin are negative 28.1%, 16.2%, and 28.6%, respectively. And its trailing-12-month cash from operations of $2 million is 98% lower than the $97.73 million industry average.

POWR Ratings Reflect Uncertainty

TOST has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. TOST has a D grade for Quality and Stability. The company's weak financials and poor profitability are consistent with its Quality grade. In addition, the Stability grade represents that the stock has a higher volatility than its peers.

Among the 58 stocks in the D-rated Software – Business industry, TOST is ranked #50.

Beyond what I've stated above, you can view TOST ratings for Value, Growth, Sentiment, and Momentum here.

Bottom Line

While the restaurant industry is still rebounding from the impact of COVID-19, continuing labor shortages and rising costs are adding to its challenges. Consequently, TOST failed to meet the market’s expectations in the recent earnings release, and its disappointing outlook for the coming quarters exacerbated investors' concerns. In addition, analysts expect its EPS to decline and remain negative in the current year. So, given the company's weak profit margin and current financial instability, we believe the stock is best avoided now.

How Does Toast Inc. (TOST) Stack Up Against its Peers?

While TOST has an overall D rating, one might want to consider its industry peers, F5 Networks Inc. (FFIV), which has an overall A (Strong Buy) rating, and Agilysys Inc. (AGYS), and VMware Inc. (VMW), which have an overall B (Buy) rating.

Click here to check out our Software Industry Report for 2022

TOST shares were trading at $18.57 per share on Thursday morning, up $0.78 (+4.38%). Year-to-date, TOST has declined -46.50%, versus a -12.70% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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