Toast becomes profitable. Is now the time to buy the discounted stock?

Toast (TOAST 0.98%) unexpectedly posted a profit in the second quarter, but its stock has yet to gain traction on its strong results and raised guidance. Shares of the cloud-based restaurant management software company are up more than 25% year to date, but well above their recent highs.

Let’s look at the company’s latest quarterly results, future outlook and valuation to see if this is a good time to buy the downbeat stock.

Increased guidance once again

Toast’s Q2 revenue rose 27% to $1.24 billion. Subscription revenue rose 37% to $166 million, while financial technology revenue rose 27%. Its annual recurring revenue (ARR), which consists of subscription revenue and its annualized full-year fintech gross profits, rose 29% to $1.5 billion.

Toast’s gross payment volume (GPV), which is the payments the company processes for its restaurant customers, rose 26% to $40.5 billion. The total number of locations using its solution grew 29% to 120,000, with the company adding 8,000 new locations this quarter.

Toast has begun expanding internationally and reached 2,000 international locations in the UK, Canada and Ireland this quarter. It also said it is seeing success in new verticals such as chain restaurants and food and beverage retailers.

Earnings per share (EPS) came in at $0.02 versus the loss of $0.02 projected by analysts. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), meanwhile, rose from $15 million a year ago to $92 million. It generated operating cash flow of $124 million, with free cash flow of $108 million.

Toast again raised its full-year forecast for both revenue and adjusted EBITDA. It now projects subscription services and fintech gross profit to be in the range of $1.34 billion to $1.36 billion, representing growth of 27% to 29%. Adjusted EBITDA is now expected to be between $285 million and $305 million.

Toast previously guided for subscription services and fintech gross profit to be in the range of $1.325 billion to $1.345 billion, with adjusted EBITDA between $250 million and $270 million. It initially guided for subscription services and fintech gross profit of $1.3 billion to $1.32 billion and adjusted EBITDA to be between $200 million and $220 million.

For the third quarter, Toast is looking for subscription services and financial technology solutions gross profit to rise 23% to 27% to $345 million and $355 million, with adjusted EBITDA between $70 million and $80 million.

Image source: Getty Images.

Should investors buy the dip?

Toast does a good job balancing growth with expense controls, leading to a profit windfall in the quarter, as well as adjusted EBITDA growth and strong cash flow generation. The company continues to do a great job adding new locations, setting a record quarter, while also starting to expand internationally and add customers in adjacent categories such as grocery retailers.

At the same time, Toast continues to innovate and invest in its products. As it enters the food and beverage retail market, it will look to add important features such as SNAP and EBT support along with deli management. This is another nice opportunity that the company has in front of it and it seems to be off to a good start. As Toast continues to innovate in its technology and payments stack, potential price increases should also be another reason for the company.

I think the best way to value Toast is based on its projected 2025 ARR because its fintech revenue has a low gross margin. ARR is more like the high-margin revenue generated by software-as-a-service (SaaS) companies and is a better measure than valuing the company from its sales. Assuming ARR growth of 25% next year to about $1.7 billion and an enterprise value (EV) of about $11.9 billion, which takes into account net cash of $1.2 billion, the company trades at an EV-to-ARR multiple of 7x. This is an attractive valuation given its growth and prospects.

While there are some short-term concerns about the economy and the impact it will have on restaurant spending, Toast remains well positioned for the long term. As such, I would be a buyer of the stock on this current weakness.