Business Breakdowns
· 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.
· Sean Barrett, Matt Reustle
Enterprise is really cooking, no pun intended, where they've won Applebee's and a handful of other really high-profile enterprise customers that would've seemed impossible many years ago. So for people who thought that the TAM for Toast would top out at 400,000 or 500,000 because they'll never get the enterprise, now the TAM in the US is actually bigger than the restaurant market. It's enterprise SMB plus grocery plus hospitality, and then they quietly built an international business where they're in the market in UK, Ireland, Canada, Australia. Management would tell you that those markets are growing faster than Toast grew in the US when they started here. I was in London last week seeing companies. You're seeing Toast all over the place, and I wasn't seeking them out. I was just walking into random restaurants, and Toast is all over the place. They're winning there. Big picture, Toast has 160,000 locations on its platform today. Even if you take out China, they have a 15 million location TAM globally, most of which is served by legacy technology. So we think they're just scratching the surface, and they have the opportunity to take themselves from $2 billion gross profit today to $10 billion in 2035, but we actually just think that's a stopping point, and they can keep going from there. [00:00:00] S0: When you think about valuing a business with that type of growth runway and ambition, what's your general approach for valuation for this business?
· Sean Barrett
[00:00:00] S1: There are three ways that we look at valuation here. It all is in an effort to get back to intrinsic value. The first way you can look at it is on a multiple of 2027 GAAP earnings, which we talked about. It's trading at 18 times 2027 GAAP earnings. That would be an even lower multiple if you want to adjust for the almost $2 billion of cash they have on the balance sheet. For a 25% gross profit grower and a 30-plus percent EPS compounder, that screens tremendously cheap. More importantly, we think about intrinsic value and what kind of MOIC we should expect or multiple on invested capital over the next ten years. Because we have our TAM build, we have our segment build, we know the win rates, and we think it's a highly predictable outcome from a business perspective. So over the next ten years, they're gonna take gross profit, we think, from $2 billion to over $10 billion. At that point, you'll be left with a business that's doing over $3 billion of GAAP net income, and you will have generated your whole market cap in cash. So if you get a horrible multiple in 2035, you have something like a 4X MOIC. And if you have a Nasdaq market multiple, you probably have something closer to a 10X MOIC. And then just on a DCF intrinsic value today, if you wanna discount all the cash flows back, fair value today is something like $50 per share or more versus the recent stock price at $22 or $23. No matter how we slice it near term, long term, we're really excited to continue to be on this journey with Toast, and we think it's gonna be a good outcome for investors.
· Matt Reustle
[00:00:00] S0: What are the risks besides the obvious execution? What stands out the most to you?