Boston restaurant payments firm, Toast (NYSE: TOST), has filed an S-1/A as it gears up for an initial public offering (IPO). The S-1/A indicates that Toast will offer the public common stock at a price range of $30 to $33 per share. At the top of the range, the company would raise $825 million. Toast’s last private valuation was early last year when it was valued at $4.9 billion and raised $400 million. Post-IPO, the company will have 499,332,681 shares outstanding, or if underwriters exercise their 30-day option to buy stock, 502,593,550 shares outstanding. At the bottom of the IPO price, Toast will be valued at $14.98 billion. At the top of the range, we are looking at $16.48 billion. If we factor in the underwriter’s option, we are looking at a valuation range between $15.08 billion and $16.59 billion. Given the significant growth and an excellent second quarter, it seems clear that it will likely lead the company to surpass its 2020 valuation. This is an immense achievement considering that the company had to layoff 50% of its staff when lockdowns forced restaurants to close. As restaurants shifted to delivery and the economy reopened, Toast has soared.
The company’s revenue comes from a mix of SaaS income and fintech revenues (mostly payments). Toast’s valuation will be interesting in giving us an idea about vertical SaaS startups’ valuations with a payments-and-SaaS business model.
Toast Has Adapted to the New Normalip
When the pandemic forced restaurants to close, the chief executive officer (CEO) Chris Comparato, wrote in a blog post that restaurants sales had “declined by 80% in most cities”. Nevertheless, Toast found a way to adapt to the new normal, alongside restaurants. Restaurants embraced a more delivery-centered business model and utilized takeouts, contactless ordering, and outdoor options to keep their facilities safe for consumers. Sensing that there was still business to be done, Toast acted strategically. The company gave restaurants a month’s worth of software credit and gave them free access to technology to help facilitate takeouts, gift card purchases, and online ordering.
The third quarter witnessed an increase in Toast’s revenue against the previous year. In November, financial and operating results were so strong that the company held a secondary share sale to allow present and former employees to sell as much as 25% of their holdings at a price that gave Toast an $8 billion valuation.
If there is one quality that an investor should look for, it is operational excellence on the part of a business’ managers and in this period, Toast showed this in bucketfuls.
Toast is Growing
That turnaround was not the end of the story. Since then, Toast has continued to grow at phenomenal rates. Between 2019 and June 2021, the company went from serving around 27,000 locations in 2019 to serving over 48,000 in June of this year.
Annual recurring revenue (ARR) shot up 118% year-over-year,in the second quarter to some $494 million. Most of the company’s revenue is derived from financial technology solutions, which are fees from payment transactions.
It Costs a Lot of Money to Earn That Revenue
Payment transactions come with high costs, resulting in a gross margin that is lower than that of the typical cloud company. For example, whereas Toast’s gross margin in the last quarter was around 21%, the median cloud company enjoys gross margins of 74%.
The costliness of the business is a massive part of the reason why the company made a net loss of $135.5 million in the last quarter.
Shareholders Won’t Have a Voice
The company will issue 21,739,131 Class A shares of common stock, each share with just one vote. Class B shares will have ten votes. In other words, Class A investors should not expect to have a voice in the running of the business. The IPO is not an opportunity to be part of the governance of the firm. Instead, as is increasingly typical of tech startups, we are asked to trust founders and give them fresh capital and hold positions for the long-term without having a voice in the running of the business. If you don’t like that, you simply don’t buy into the company.
The Appetite for Food Tech is Massive
Despite the downsides of this fast-growing, innovative company, it is likely to enjoy a lot of investor enthusiasm. Investors are betting on the shift in the economy and how people live and work, being the home of the following great companies. The market opportunity is large and growing fast, and investors have seemed willing to overlook flaws even when they have been awful. For example, DoorDash has reached a valuation of $71 billion despite never earning a profit; Uber has been allowed to evolve from ridesharing to food delivery; and Airbnb has reached an unbelievable $100 billion valuation even as the pandemic ravaged its business.
As you prepare to send your children off to boarding school, it is interesting to weigh the pros and cons of investing in a loss-making business where shareholders have no voice, but where the market opportunity is so large.
