Toast Earnings: Shares Fall on Lofty Expectations and Slowing Restaurant Sales and Are Now Cheap

We see value in narrow-moat Toast’s shares after an 18% decline in Nov. 7 aftermarket trading, although we plan to lower our $21 fair value estimate by a high-single-digit percentage after digesting results. We harbor concerns about the firm’s medium-term sales prospects after net unit adds of 6,500 came in lighter than our 6,900 forecast, and we expect to trim our long-term software average revenue per unit estimates as Toast expands into smaller market segments. Commentary about “gradual” growth in ARPU going forward gave investors heartburn, and while we don’t believe that the firm is approaching the end of its high-growth phase, we do believe it is likely to see more pronounced diminishing marginal returns on new unit additions than originally anticipated. Our revised forecasts see Toast achieving closer to $10,000 in software ARPU in 2032 (down from $13,500), partially offset by an uptick in total units (to 315,000 in 2032 from 290,000) as it increases its footprint among smaller restaurant, enterprise, and international restaurants.