Investment Thesis
a. Payment and Software combination increases monetization opportunities
Toast’s combination of software and payment revenue is attractive and puts the company at the heart of restaurant operations, resulting in a growing ARR. The platform’s breadth and depth of product solutions have increased monetization opportunities.
This is shown in the increased of SaaS ARPU to US$30K in Q1’24, from US$20K in Q1’2021 (a 50% increase) while Locations with >US$10K SaaS ARPU increased to 14$ in Q1’24 from 2% in Q2020.
Toast have also done several strategic acquisitions to expand its payment and software’s product portfolio. An example would be the acquisition of Sling in 2022, an employee scheduling, communication and management solution, to expand into team management space.
Hence, with continuous addition of features to its original platform and increased opportunity to upsell (explained in the next point), Toast should be able to further drive its ARPU and ARR growth.
b. Focus on upsell and product-led growth initiatives delivers more value to customers, leading to ARPU growth
Over the past 2 years, Toast has been refining its up-sell and cross-sell strategy to complement its new business acquisition efforts as they recognized that there are substantial opportunity to drive Average Revenue Per User (ARPU) growth from existing customers. This strategy has driven the ARR growth by 29% YoY to US$1.5B as of Q2’24.
As customer realized the value of Toast’s full platform, the company has seen an increase in product adoption rate across its portfolio. As of 2023, ~43% of Toast locations used >6 products on top of its integrated POS system and payment solutions (an increase from ~32% in 2021, 41% in 2022). Toast is also seeing positive reception to its tiered, bundled product suites, which simplify sales process and drive product adoption. To date, ~30% of locations that adopted Digital Storefront Suite had upgraded to the Pro-tier, signalling further potential for ARPU growth.
Toast has made various R&D efforts and expanded its partnerships network to offer a broad range of features and solutions, ranging from guest management to employee scheduling and financial technology integration. The new feature adoption is also key to driving per-location revenue. Notably, the launch of AI-powered CRM and Sous-Chef platform has been crucial to driving further engagement from existing customers.
Furthermore, Toast has been optimizing their upsell team to better integrate with the new business team to ensure that both new and existing location receive comprehensive support to maximize product adoption.
Hence, with continuous addition of features on top of core POS and payment processing and opportunity to upsell to increase, Toast is poised to achieve long-term ARPU and ARR growth.
c. Expansion into New Markets, Adjacent Verticals and International Growth TAM
Toast's strategic expansion into adjacent markets, including retail and international sectors, has shown early traction. The company aims to leverage its core expertise in the restaurant industry to disrupt traditional sectors like retail. Toast’s entry into retail has gained traction, with 1,000 locations booked in the first few months, indicating strong demand for cloud-based integration solutions in this market. The retail sector presents a significant opportunity for Toast, with approximately 220,000 locations and a $660 billion spend in the U.S.
Internationally, Toast has also seen promising progress, onboarding over 2,000 locations in markets such as the United Kingdom, Canada, and Ireland (with a total TAM of ~280K locations opportunity). A key factor in this success is Toast's localized go-to-market strategy, tailored to meet the unique needs of each region. Features like Online Ordering, Mobile Order & Pay, Gift Cards, and Kiosks have been well-received, with adoption rates surpassing expectations. In June, about 50% of international bookings included Toast’s Online Ordering solution, reflecting strong demand among international customers. To further drive international growth, Toast plans to introduce additional features, such as marketing tools, Toast Tables, and Hotel Property Management System integrations.
As a result, Toast is positioned to deepen its market penetration internationally, driving future ARR growth.
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ESG factors
Based on the SASB Standards, we have identified the following key ESG factors:
a. Energy Management: given the nature of business utilising cloud, this industry operate or rent increasingly more data centres. Hence, managing water and energy use associated to IT infrastructure is relevant. Companies with high energy and water usage will face reputational risks, particularly with increasing global regulatory focus on energy efficiency.
b. Customer Privacy: As Software & IT Services entities increasingly deliver products and services over the Internet and through mobile devices, they must carefully manage the use of customer data and handling of access to a wide range of customer data. Companies who fail to effectively manage data privacy will face regulatory and reputational risks that may translate to decreased revenue, reduce market share and potential financial impacts such as fines and associated legal costs.
c. Data Security: Software & IT Services entities are targets of growing data security threats from cyberattacks, which puts their own data and their customers’ data at risk. Companies who fail to prevent, detect and remediate data security threats may suffer reputation damage which will result to reduce demand, decreased market share, increased turnover and financial impact from expenses associated to remedify data breaches.
*Do note that all of this is for information only and should not be taken as investment advice. If you should choose to invest in any of the stocks, you do so at your own risk.
*请注意，所有这些仅供参考，不应被视为投资建议。如果您选择投资任何股票，您需要自行承担风险。
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