Restaurant technology company Toast (TOST 1.38%) recently went public in a highly anticipated IPO, and the stock's current market cap of nearly $27 billion is causing many investors to take a step back. However, in this Fool Live video clip, recorded on Sept. 27, Fool.com contributor Danny Vena explains why investors might want to take a closer look, while fellow contributor Matt Frankel, CFP, explains why he's in wait-and-see mode.
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Danny Vena: One of the things is if you are an owner of a restaurant, you have this herculean task of having to handle a multitude of different computer software. You have to handle software for placing your guest orders. You need software to handle your payment processing, software for your rewards program. Software for coordinating your kitchen operations, and for managing employees. Frankly, it's just a mess.
What Toast has done is they have come in and put all of the different software needs for a restaurant into one easy to access, Cloud-based integrated system. Now, Toast has quickly become the leading platform serving the restaurant industry. But really, it only serves about six percent of the restaurants in the US. So it does have a very large market to go. Now, this is a company that is consistently increasing the number of restaurant locations that it serves. Most recently up 45% year-over-year to about 48,000. In the prior year, obviously, growth was up a little bit higher.
Now, their gross payment volume is up to about $25 billion in the year of 2020, that's up about 17%, and growth has accelerated so far in 2021 with its gross payment volume of 23 billion. Just during the first six months of this year, it's almost hit a total payment volume as it did for all of last year together. That's up 125%, so that's really pretty impressive growth. Now, Toast gets revenue from a couple of different sources, from subscription services, from its financial technology solutions, from hardware, and then from professional services. Now, revenue has been pretty impressive, as I said, and accelerated during the first six months of this year. Now, the fact that the recurring nature of how the company makes money, Software as a Service platform, obviously, once you get your basic costs covered, adding new customers really drops a lot more to the bottom line.
In 2020, Toast's annual recurring revenue grew 77% year-over-year. During the first six months of this year, that growth is up 118%. These are some pretty impressive growth numbers, and annual net revenue retention rate that Jon was talking about before, this is 110%. Essentially what that's saying is, not only is it growing its customer base, but existing customers are spending 10% more than they did last year, so that bodes well for the future.
Another thing that's really unusual for an early stage Software as a Service business, it's not unusual that the company is still losing money, and in 2019, it lost $209 million, in 2020, it lost $248 million. So far, this year, that's actually right in between the two. A loss of about $235 million. However, the company is generating positive free cash flow of $39 million so far this year, reversing the trend from the prior period. Again, this is a company that it's a little bit on the risky side because it is so very brand-new. It's only been trading within the past month. This is one that you want to keep an eye on. But I think this is a company that because it's serving a niche market, and because of the fact that restaurants really need this, this is really disruptive in the restaurant software space.
I think this is a company that could do relatively well. I am impressed with the potential, and it's a company that I'm definitely keeping an eye on, though I have not bought any shares yet.
Matt Frankel: My big question with Toast, and why I didn't rank it higher is the same reason I'm not a big fan of Peloton (PTON -0.32%) or those kind of companies right now. How much of their growth is due to the pandemic? The restaurant industry, I feel like the big growth trends lagged the tech industry. Like Peloton, I just mentioned, their big growth was in 2020, as everyone had to stay home, and workout at their house. Restaurants are getting that surge in the first half of 2021 as everything's reopening. The omni-channel restaurant presence was obviously being built out in 2020. But they're getting a big surge in 2021 also because of all the reopenings. My question is, how much of that do you think it's sustainable growth?
Vena: Well, and that is the big question. I like the fact that they were growing prior to the pandemic pretty well, which I think gives you if you do '21 growth compared to 2019 growth, that factors out the pandemic. I think that you can see it's pretty impressive growth. But again, I don't usually buy into an IPO until it's had a couple of quarters under its belt as a public company so I can see how management's handling their growing pains, and joining the public market.
