Business Breakdowns
· Matt Reustle
[00:00:00] S0: On the broader perspective of competitive advantage moats, we talked a little bit about hardware, software, logistics. I guess just how would you frame it to the extent that we have mentioned a lot of varying things, but how would you package that together and just talk about their moat?
· Sean Barrett
[00:00:00] S1: There's been so much negative news on software in the last six months. We really wanted to simplify it, and we always come back to what we call the laws of physics here at Counter Global. Charlie Munger used to call them his mental models, but these are rules that have been durable for investing for decades, and they hold true. And so we rely on those superpowers, we rely on those laws of physics. Toast is a mission-critical operating system. They have strong network effects. The industry is standardizing on this platform. They have huge data advantages. They have domain expertise. Speaking of Charlie Munger and his mental models, one of his actual mental models that he used to talk about a lot was that in any capitalist system, the specialist wins the outsize share of the economics. He famously quoted that in a lot of his speeches. We believe in these laws of physics, these mental models, and the interesting thing for Toast is that it really checks all the boxes. The two structural moats that I think people don't talk about enough are hardware and how complicated it is for Toast to deliver this great hardware, and then the distribution advantages they have. Starting with hardware, it took them many years to build purpose-built hardware for the restaurant industry. But it's not just about the design, it's about the supply chain, the chips, making sure you have the right amount of inventory for your share gains. It's very, very complicated. And then the distribution is also really complicated. Toast has feet on the street in every major city in America, and those advocates walk into restaurants all day long, talk to owners, make sure they're being served properly by Toast. It's a huge part of the story that's really hard to replicate. I would just give you an example. A year or two ago, a high-profile startup launched. It's supposed to be AI native, serving the restaurant space. And I think they thought probably with AI coding and all the advances going on with AI, that they could copy Toast product and have something up and running pretty quickly. Fast-forward to today, we aren't seeing them at all in the market. Last I heard, they extended their roadmap. They think it's gonna be at least another two years before they have something that looks like Toast.
· Sean Barrett, Matt Reustle
And then at that point, good luck building the supply chain, good luck building the hardware, and then you've gotta get feet on the street in every major city in America and abroad. I think it's just way harder to disrupt this space because the moats are so powerful. [00:00:00] S0: We haven't talked about the management team or just culture within the business. Tell me a little bit about who's behind it and anything that's unique about the culture to the extent there is something unique.
· Sean Barrett
[00:00:00] S1: It's a really phenomenal culture. The restaurant business has had a lot of ups and downs over the years. It's a culture of people who are really resilient. They put the customer first. So it's product-led, it's resilient, and it's customer first, and that's how I would describe their culture. From the top, it's a founder-led team. It's a handful of really, really good people running this business. At Counter, we evaluate our management teams on three pillars. We talk about this a lot. It's integrity, ambition, and innovation. So when you think about integrity first and you look at this management team, Aman Narang and Elena Gomez, they're really great managers. They tell it like it is. They're super high integrity people, and the people around them are super high integrity. On ambition, it's probably one of the more ambitious teams that we see in public markets, and they've been this way for many, many years. In 2020, I remember, I think they had 20,000 or 30,000 restaurants on the platform, and they were talking about their path to 200,000 restaurants and then their path to 400,000 restaurants, and everyone thought they were crazy. The TAM can't support that. You'll never innovate to open up new TAMs. It'll be really hard. Well, they're probably gonna hit 200,000 restaurants this year or early next year. Now, they're doing $2 billion of gross profit, and they're talking about their path to $10 billion of gross profit, and I think there's some skepticism out there. They have the track record of doing it. And so that gets to the third pillar we think about, which is innovation. This is the team you want in an AI world. It's three co-founders who met getting their computer science degrees at MIT. They really understand the technology. They really understand AI. And I can tell you from spending time with them, they're more invigorated and more excited than I've ever seen about the opportunity because it allows them to accelerate their roadmap, open up new TAMs, and just serve the customer in a way that wasn't really possible a few years ago.
· Matt Reustle
[00:00:00] S0: On that $10 billion gross profit milestone and how you think about TAM, what is the runway here? Where does it come from? Is it US-based? Is it international? Talk a little bit about the path further out than the next three to five years, maybe.
· Sean Barrett
[00:00:00] S1: From a big picture, just a review of the model and how the business model works, 'cause it's a beautiful compounder. So the things that matter are location count, SaaS ARPU, payments ARPU, margins and multiple. If you look at the location count, if you double the location count and then you can also grow your ARPU, you actually have the chance to 4X and then 8X the business over time. But we care a lot about the building blocks that get you there. That's how we need to underwrite it based on each specific TAM. The beauty of the Toast story is how they've sequenced their growth into new TAMs and opened up new TAMs over time. We talked about the core SMB as the primary driver of the business many years ago. At this point today, probably 150,000 of their 160,000 locations are in that core SMB US market, and they're winning 50% of new restaurant openings. On a local level, I would say the trends are even more impressive. So what you see when you go into the city-level data is that they usually start with a two percent market share, then maybe four percent the next year, six percent the year after. But when a market hits ten percent of market share, it becomes what management calls a flywheel market, and that's when the network effects take hold and the market decides it will standardize on Toast. And then you actually see market shares accelerate faster as they get bigger. We have data on some cities right now that are 25% to 30% market share, and they're actually adding more market share in those cities than they are in the smaller cities. It's a great playbook. We think there's a long runway to go just in that core SMB, and certainly management thinks so as well. The interesting thing from there is that they've already innovated and built the product for four or five new TAMs beyond that, and now they're actually in market, and it's all about execution. They're in market with a grocery store offering for grocery, liquor, and gas stations. That market primarily is served by legacy technology where Toast has a huge right to win. Customers love the offering. We've talked to a lot of customers, and we think there's a long runway there. They've started to win in hospitality. You saw a big win with Marriott, so they're winning hotel, retail, and F&B. That's a new offering in the last couple years.