Toast (NYSE:TOST) Delivers Strong Q3 Numbers, Stock Soars

Jabin Bastian /
2022/11/10 4:13 pm EST

Restaurant software platform Toast (NYSE:TOST) reported Q3 FY2022 results beating Wall St's expectations, with revenue up 54.6% year on year to $752 million. Guidance for next quarter's revenue was $745 million at the midpoint, 2.04% above the average of analyst estimates. Toast made a GAAP loss of $98 million, improving on its loss of $252.4 million, in the same quarter last year.

Is now the time to buy Toast? Access our full analysis of the earnings results here, it's free.

Toast (TOST) Q3 FY2022 Highlights:

  • Revenue: $752 million vs analyst estimates of $720.9 million (4.31% beat)
  • EPS: -$0.19 vs analyst estimates of -$0.20 (4.5% beat)
  • Revenue guidance for Q4 2022 is $745 million at the midpoint, above analyst estimates of $730 million
  • Free cash flow was negative $80 million, compared to negative free cash flow of $30 million in previous quarter
  • Gross Margin (GAAP): 20%, up from 17.3% same quarter last year

"Toast delivered strong results in the third quarter, surpassing $100 billion in annualized GPV for the first time and driving sustained revenue momentum and continued margin improvement,” said Toast CEO, Chris Comparato.

Founded by three MIT engineers at a local Cambridge bar, Toast (NYSE:TOST) provides integrated point of sale (POS) hardware, software, and payments solutions for restaurants.

Enterprise resource planning (ERP) and customer relationship management (CRM) are two of the largest software categories dominated by the likes of Microsoft, Oracle, and Salesforce.com. Today, the secular trend of mass customization is driving vertical software that customizes ERP and CRM functions for specific industry requirements. Restaurants are a prime example where a set of customized software providers have sprung up in recent years to create unique operating systems that blend tax and accounting software, order management and delivery, along with supply chain management.

Sales Growth

As you can see below, Toast's revenue growth has been incredible over the last two years, growing from quarterly revenue of $236.7 million in Q3 FY2020, to $752 million.

Toast Total Revenue

And while we saw even higher rates of growth previously, the revenue growth was still very strong; up a rather splendid 54.6% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $77 million in Q3, compared to $140 million in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Toast is expecting revenue to grow 44.6% year on year to $745 million, slowing down from the 112% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 32.7% over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Toast's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 20% in Q3.

Toast Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.20 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.

Key Takeaways from Toast's Q3 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Toast’s balance sheet, but we note that with a market capitalization of $9.11 billion and more than $1.05 billion in cash, the company has the capacity to continue to prioritise growth over profitability for some time.

We were very impressed by the strong improvements in Toast’s gross margin this quarter. And we were also excited to see the really strong revenue growth. Zooming out, we think this impressive quarter should have shareholders feeling very positive. The company is up 7% on the results and currently trades at $21.4 per share.

Toast may have had a good quarter, so should you invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 70% year on year and best-in-class SaaS metrics it should definitely be on your radar.

The author has no position in any of the stocks mentioned.