Up more than 60% year to date, Toast(NYSE: TOST) stock has had a strong run in 2024, and a recent price increase could extend the restaurant software company's momentum into next year as well.
The change to Toast's credit card processing fee appears small on the surface, but it could be a driving force behind the company's results and stock price in 2025.
Second time is the charm
At the start of September, Toast raised its credit card processing fee up to 0.23%. This is the first time the company has increased its credit card processing fee in 12 years.
However, it's not the first time the company has tried to increase prices. Last year, Toast implemented a $0.99 charge to restaurant customers on orders made through its online ordering platform of $10 or more. However, the move angered both restaurants and diners, leading Toast to quickly reverse the decision. The botched price increase and fallout that followed contributed to CEO Chris Comparato's resignation. Co-founder Aman Narang has since taken the helm.
This time around, Toast is enacting its price increase at the restaurant level, giving business owners the option to decide how and if they want to pass the cost along to customers. Meanwhile, Toast is also introducing a surcharge feature on its point-of-sale system that will allow restaurants to add charges for customers paying by credit card to help offset any higher processing fees.
While 0.23% may not seem like a lot, Toast will process close to $160 billion in gross payment volume this year. At that scale, even a small change can add up to millions of dollars.
Toast said the fee increase will not impact all restaurants, but the company indicated earlier this year that it's set to embark on an "ongoing cadence of small steady changes in price." This is likely just the first of a series of upcoming price increases as the company tests how customers will react after its stumble last year.
Image source: Getty Images.
Continued strong tailwinds
Besides price increases, Toast continues to grow in a few ways. The big one, of course, is through expanding its presence across more restaurants. While the company has been able to get a foothold in about 120,000 locations, there are about 750,000 restaurants in the U.S. alone.
Toast also has a large global opportunity. It reached 2,000 international locations in the U.K., Canada, and Ireland as of the second quarter, which was up from about 1,000 to start the year.
Meanwhile, the company has expanded into adjacent areas such as coffee shops, hotel restaurants, bakeries, and quick-service restaurants. It's now looking to delve into the retail food and beverage market as it recently added important features for these businesses such as supporting SNAP and EBT, as well as deli management.
Toast has long been a strong innovator, offering new product modules to help its restaurant clients better manage their businesses. This allows Toast to also grow within its large installed customer base.
Across the restaurant industry, spending is going up. Growth in this area still remains strong with industry sales up 3.7% year over year in September. That was more than double the 1.4% growth seen in non-restaurant retail sales.
Time to buy the stock
While some investors may try to value Toast on a price-to-sales basis, this can be misleading given its fintech revenue has a low gross margin. Instead, investors should look at the company's annualized recurring run rate (ARR), which includes its subscription revenue and fintech gross profits.
The company grew its ARR 29% last quarter to $1.47 billion, meaning the stock trades at an enterprise value-to-ARR multiple of about 10. Thanks to the combination of price increases, geographic expansion, growing restaurant spending, and new services, Toast can continue putting up very strong growth in the years ahead. As such, I view this valuation as attractive relative to the double-digit price-to-sales multiples of many software-as-a-service (SaaS) companies enjoying the same level of growth.
In the year ahead, investors should follow how the change to credit card processing fees boosts Toast's business -- I do not expect this price increase to be the last.
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Geoffrey Seiler has positions in Toast. The Motley Fool has positions in and recommends Toast. The Motley Fool has a disclosure policy.
