Toast, Inc. TOST

Key data

The business

Toast sells restaurants the whole system that runs the front and back of the house: the payment terminal by the register, the handheld a server carries to your table, the kitchen display, and the software behind them for menus, online orders, payroll and gift cards. About 180,000 restaurant locations run on it, up 22% in a year. The money arrives three ways. Most of it is a cut of every card swipe, the payments layer riding on $215 billion of diner spending over the past year. On top sits a monthly software fee. Then a growing third slice: loans to restaurants, advertising, and other financial products. The moat is switching cost. A restaurant that runs its payroll, its menu, its online ordering and its card processing through one vendor does not rip it out on a Tuesday during the lunch rush. That stickiness is what lets Toast keep raising what each location is worth to it.

The numbers

Toast crossed from burning cash to compounding it in about two years, and the second derivative is the story.

Earnings per share doubled across these five quarters while revenue rose 23%. The lever is gross profit, the money left after the card networks and processors take their cut, which grew 32% last quarter against 23% revenue growth. That gap, gross profit outrunning revenue for a second straight quarter, is exactly the signal the re-rate rests on, and it held. Toast processed $215 billion of card volume across those 180,000 locations, about $1.2 million each, and volume, not the take rate, is doing the heavy lifting: locations grew 22% while the cut per dollar held. That is the healthier of the two ways to grow.

The four-year arc: revenue up 3.6x since 2021, a $487 million loss turned into $342 million of profit. But operating income was $292 million last year, under a nickel of every revenue dollar, so the margin is real and still thin, which is why small moves in it swing earnings so hard. Free cash flow ran about $620 million over the past year against no debt and $1.0 billion of cash, and the company has beaten the earnings estimate in three of the last four quarters. Wall Street prices this at $8.8 billion of revenue and $1.72 of earnings for 2027, up from $6.2 billion and $0.56 in 2025: it expects the compounding to continue and roughly double earnings again. What this memo believes the crowd underweights is the third revenue slice, the loans and ads attached to locations Toast already serves, which carries software economics and sits in few models today. The print that settles it is gross profit growth against revenue growth.

Management

The record here is mixed. Insiders sold about $18.6 million over the past year and bought nothing. Co-founder Aman Narang sold $8.6 million across two August sales, and Jonathan Vassil sold another $3.1 million. Plan status is not disclosed in the filings pulled, so read those as a statement about price, not panic. Against that, the company itself bought back $323 million of stock in the first quarter of 2026 alone, up from $107 million in all of 2025, spending its cash down from $1.35 billion to $1.0 billion to do it, at a price in the low $30s. Buying your own shares hand over fist while your founders sell theirs is a tension worth holding in view, not a verdict.

How it fails or surprises you

Take rate compresses as Toast moves upmarket. The payments cut is fattest on small restaurants with no leverage. As Toast chases chains that negotiate hard, the percentage it keeps on each dollar can slide even as volume climbs. Watch the gross profit line: grow it merely in line with revenue for two quarters and the engine has stalled.

Dining spending rolls over. Toast's revenue is a slice of what diners spend, and restaurant spending is among the first things households cut. A recession shrinks payment volume directly, and with operating margin under 5%, thin leverage runs in reverse fast. The tell shows up in same-store volume before it reaches the location count.

The attached software and financial layer inflects (right tail). Toast is selling loans, ads and payroll into 180,000 locations it already owns, at margins the market has not paid for. If revenue per location climbs while payment volume merely holds, earnings surprise well above the $1.72 penciled in for 2027. The first sign is the software and financial-product lines outrunning the payments slice.

Closing thoughts

The payoff turns on whether gross profit keeps outrunning revenue, which it has for two straight quarters and is why the stock sits at 20 times next year's earnings rather than the 40-plus it fetched on trailing profit. The fatter tail looks like the upside, because the operating leverage is early and the attached software layer is real, but the left tail is genuine: this is discretionary consumer spending on a thin margin, and a dining recession would hurt fast and visibly. What is at risk if volume rolls over is a year or two of the compounding the price now assumes. What the upside is worth is a business earning software margins on 180,000 locations.

The bet is still that restaurants keep ripping out their old cash registers and switching to Toast, and that Toast keeps selling each location more on top of the register: payroll, loans, gift cards. What breaks it is take rate sliding while location growth slows, and the one pair of numbers that tells you first is gross profit growth against revenue growth. When those two converge for two quarters running, the story the price is telling is finished.