The IPO of toasts could value restaurant technology vendors at $ 16 billion

Toast is preparing for a IPO next week that could value the restaurant technology company at more than $ 16 billion, which is double its valuation over the sale of shares secondary last November.

The company has taken a very uneven path to the New York Stock Exchange.

Prior to the Covid-19 pandemic, Toast thrived by selling technology to restaurants that helped them combine their payment systems with inventory management and multi-site restaurant controls. Investors valued the company at $ 5 billion in February 2020.

Two months later, Toast cut about 50% of its workforce and froze hiring as coronavirus cases increased and companies closed. Executive Director Chris Comparato wrote in a blog post at the time that, in March, “as a result of the necessary social distancing and mandatory government closures, restaurant sales fell by 80% in most cities.” .

But Toast hurried to turn things around. Suddenly, restaurants that had always relied on in-house meals had to offer takeaway food, delivery, outdoor options, and contactless orders. Initially, Toast granted its customers a one-month credit for software commissions and provided free access to their technology that allowed them to purchase, order online, and purchase gift cards.

In the third quarter of 2020, revenues were up again from the previous year, and in November the company experienced such a big rebound that it organized a sale of secondary shares so that current and former employees could sell up to 25%. of its shares a price valued at Toast at $ 8 billion.

Now, Toast says it served more than 48,000 restaurant locations by the end of June, up from 27,000 in 2019. Annual recurring revenue rose 118% in the second quarter of a year earlier, to $ 494 million. Most of Toast’s revenue comes from what the company calls financial technology solutions, which consist primarily of commissions paid by customers for payment transactions. Less than 10% comes from subscriptions.

On Monday, in its updated IPO brochure, Toast said it plans to sell shares for between $ 30 and $ 33, reaching more than $ 700 million at the top of the range. That would value the company at $ 16.5 billion, based on its outstanding stock count.

Still, Toast is an expensive business to operate. Because much of its revenue comes from payment transactions, the company has high expenses associated with that revenue and a much lower overall gross margin than a typical cloud software company.

In the last quarter, Toast’s gross margin, or the amount of revenue remaining after taking into account the cost of goods sold, was approximately 21%. After considering all other costs, such as sales and marketing and research and development, Toast posted a net loss of $ 135.5 million in the quarter.

Even with its strong cost structure, Toast is overcoming the wave of enthusiasm from investors in technology that serves the evolving restaurant and hospitality industries, especially as it returns to a pre-existing world. Covid seems less likely.

Food delivery company DoorDash is worth more than $ 71 billion after its IPO in December and Uber has been able to keep its business changing the resources of shared participation in food delivery. Airbnb, which also went public in December, is worth more than $ 100 billion, despite firing about 25% of its workforce in May last year.

Grocery delivery company Instacart was worth $ 39 billion earlier this year and is reportedly preparing for a IPO. Through the initial outlook, investments in food technology, which include financing for distribution companies, restaurant software and other categories, reached $ 13.5 billion in the first quarter, before falling to $ 8.9 billion in the second quarter. , according to CBInsights. During the first half of 2021, that is, almost double the investment in the same period in 2019, before the pandemic.

The uncertainty surrounding the pandemic and where it is going from here could weigh heavily on how Toast investors evaluate. While the company benefits from the trend toward mobile payments and high-end acquisition, it still needs a healthy economy to flourish and restaurants continue to grow and invest in technology.

The fourth risk factor that Toast lists in its brochure is the potential of Covid-19 to wreak havoc on the economy and the market in general.

Toast acknowledges that “it cannot accurately predict the potential impact of additional outbreaks as government restrictions are relaxed, the impact of new restrictions on shelter or other government restrictions implemented in response to these outbreaks, or the impact in the ability of our customers to stay in business, each of which could continue to have a negative impact on our business. ”

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