Analyst Assesses Impact Of $0.99 Surcharge On Toast's Financials, Potentially Benefiting Gross Profit And EBITDA

Stephens & Co. analyst Charles Nabhan reiterates Toast Inc TOST with an Equal-Weight and a $22 price target.

Following reports of a $0.99 surcharge on orders over $10, the analyst outlined the numerous variables impacting TOST's financials, concluding that the fee could incrementally benefit gross profit by ~4% annualized (based on FY23E gross profit estimate) and EBITDA to the degree that fees are not re-invested. 

His analysis includes a range of assumptions on online order platform penetration, percentage of online orders over $10, and average ticket, which vary significantly across the customer base. 

As a baseline, he assumes the majority of TOST's customer base is comprised of SMB (1-19 locations/~$1 billion in GPV) table-top restaurants with an average ticket of ~$60, deriving ~5%-10% of GPV (including alcohol) from online sales. 

He views the surcharge, which will be rolled out nationwide on July 10, as a focal point in 2Q. 

Bull Case: While the surcharge announcement has received pushback, he believes TOST solutions remain best-in-class within SMB. 

With merchants recognizing the overall value-proposition and consumers accepting the surcharge, the bull-case lies in incremental fees offsetting any churn or use of alternative channels. 

Bear Case: Conversely, the bear case lies in the fee deterring further adoption of Online Ordering (utilizing the numerous alternatives in the market) and consumers favoring non-Toast platforms. 

Given President Biden's proposed "Junk Fee Protection Act," the analyst sees additional scrutiny and negative publicity as worth monitoring. 

Online ordering is one of the more penetrated solutions in the product suite. Still, it is sometimes one of several options for consumers, including GrubHub & UberEats, which also have surcharges. 

While the fee may decrease the attractiveness of ordering via TOST (particularly on small ticket items), features including loyalty and saving of credentials enhance the value proposition. The analyst note that TOST is one of many "FinTechs" pursuing pricing optimization initiatives. 

Price Action: TOST shares traded higher by 1.61% at $22.44 on the last check Wednesday.