3 Risks That Investors Should Understand Before Buying Toast Stock

Core Viewpoint - Toast provides a specialized service tailored to the restaurant industry, offering a competitive advantage, but faces significant challenges that may impact its stock performance [1] Group 1: Competition within the Payments Industry - Toast's focus on restaurant-related businesses gives it an edge over general fintech platforms like Square, which also offers tailored products for restaurants [2] - Square's extensive ecosystem may lead businesses to prefer it, creating challenges for Toast in customer retention [2] Group 2: Nature of the Restaurant Industry - The restaurant industry has a high turnover rate, with only about 20% of restaurants succeeding long-term and 60% failing within the first year [3] - Despite this, Toast's customer base grew by 29% to approximately 120,000 in Q2, and the company achieved profitability with earnings of $14 million [3] - The price-to-sales (P/S) ratio of just under 4 may attract investors, but the high turnover rate could hinder customer growth [4] Group 3: Macro Economy - The U.S. restaurant count has decreased from around 1 million pre-pandemic to approximately 749,000, highlighting the industry's struggles [5] - Menu prices have risen by 27% from February 2020 to June 2024, while salaries have not kept pace, leading consumers to reduce dining out [5] - Toast's 120,000 customers represent about 16% of the current U.S. market, indicating a shrinking addressable market [5] Group 4: International Expansion - Toast has expanded into Canada, Ireland, and the U.K., with plans for further international growth, though cultural challenges may impede this expansion [6] - Without a clear plan for the growth of its addressable market, it is difficult to assess Toast's future growth trajectory [6] Group 5: Investment Risks - While Toast has a competitive product and a notable customer growth rate, it faces significant competition and external pressures in a contracting industry [7] - International expansion may help sustain growth, but the performance outside the U.S. remains uncertain [7]