Toast To Fly High on Strong Brand Recognition in SMB Restaurant Space: Analyst

Stephens Inc analyst Charles Nabhan initiated coverage on Toast Inc TOST with an Equal-Weight rating and a price target of $18.00.
The analyst believes TOST has strong brand recognition, a leading share in SMB space, and the ability to meet changing consumer demand.
Nabhan's view factors in premium share valuation of 5.1x EV/2024 Sales (less Fintech cost of sales) compared to the peer median of 3.8x. The analyst believes TOST's favorable positioning and growth outlook in the SMB restaurant space should drive margin expansion over time.
The analyst believes in TOST's "flywheel" strategy to help drive expansion to new locations, increase cross-sales and drive operating leverage over time.
Nabhan expects TOST to accelerate the up-market shift into enterprise business and execute the remaining runway for growth/adoption in the SMB space.
With maturing of business, TOST expects sales & marketing expenses to decline to 18%-20% of gross profit compared to around 37% in 2022.
The analyst projects ARPU expansion and location growth to drive gross profit growth of 15%-20% and adjusted EBITDA margin to about 30%.
Given the shift in consumer spending towards experiential categories, Nabhan sees strong industry sales and IT spending in the range of 2%-3% of gross payment value.
The analyst sees the restaurant's ability to pass along higher costs to a weakening consumer, given concentrations in SMB space, as a matter of concern in the near term.
Price Action: TOST shares closed lower by 2.23% at $17.57 on Friday.

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