Business Breakdowns
· 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?
· Sean Barrett
[00:00:00] S1: There are three or four risks here that we think about and talk about and debate a lot. One is just macro exposure, and you hit the nail on the head early in the call. How much of that fintech gross profit is really recurring? And I think in the restaurant business, it is a tough industry in some ways. In other ways, it's also a really great industry. It's a big market with $1 trillion of volume every year. It does grow. And in tough times, we've actually seen the restaurant industry is super resilient. So if you go back to 2008, 2009, I think the restaurant industry as a whole was down low single digits, one of the better performing industries in the economy because it turns out that no matter what's going on, people need to eat. And even in tough times, they wanna go out and they wanna eat and socialize with friends or family. The second thing we think about a lot, which we talked about today, is industry churn and how that plays out for Toast over time. So we follow the data, and so far what we've seen and what we believe we'll continue to see is industry-leading gross retention for Toast versus the competition. But it's certainly something we wanna stay on top of. The third thing we think about is the price sensitivity of the customer base and how much ARPU can you really squeeze out of the customer base over time. If this was a price game and we were betting on a lot of growth to come from pricing, we would be more concerned about this. What we've seen from the Toast management team, which again is super innovative, thoughtful, customer first, is that they're coming out with products that can be meaningfully high ARPU for Toast, but also a really good ROI for the customer. Toast Grow marketing is the perfect example. $500 a month sounds like a lot when you're talking about a customer that probably has $150,000 or $200,000 of profit per year. But then if you put it in the context of raising revenue for your customer by $100,000 and replacing another cost bucket that they have where they're already spending $10,000, it actually becomes a no-brainer, and it's a win-win for Toast and the customer. And then the last thing, I saved it for last, but it's probably the risk that we stay on top of the closest, is competition. We're always talking to customers. We're always surveying customers.
· Sean Barrett, Matt Reustle
We go put feet on the street and boots on the ground to make sure that Toast is winning in the wild, but it's something that we stay super close to. [00:00:00] S0: This has been timely and fascinating, and Toast has extended way further than I had imagined before researching the name. What stands out to you as a key lesson from this business that you could apply elsewhere? [00:00:00] S1: I've known the Toast team a long time. The restaurant industry is really hard, and Toast has been through a lot over the years with COVID, now the SaaS apocalypse. They always come out on top. And so why is that? I was reflecting on why that is, and what they've reinforced for me, I think, is a lesson of resilience. Work hard, expect the unexpected, put the customer first, learn from your mistakes, and I'll leave you with a pun, stay hungry. [00:00:00] S0: I love it. Well, Sean, thank you again for coming on, sharing the knowledge, making it timely. This has been a true pleasure. [00:00:00] S1: Thanks so much, Matt. Awesome seeing you.