Hey everyone me kevin here: let's talk a little bit about a toast and the toast ipo that just occurred, so toast is a payment, a processing, uh platform and a terminal platform that is geared towards restaurants. Obviously, a big competitor here is a square, but it's not just square. It's also going to be other competitors like uh zoisk, which is another uh payment, processor and so a lot of competitors in the space. It is a competitive space which makes sense, uh and uh.

What we're gon na do right now is we're gon na look a little bit at their valuation, we're going to look at their s1 to kind of compare some of their revenues and some of their spending and margin to companies like square. It is always difficult, though, to perfectly compare these companies, since every company is different. For example, while square is a payment processor as well square, helps small businesses manage their inventories and collect payments for all sorts of different companies, not just restaurants, where a toast is specifically gearing towards restaurants, maybe catering their services a little bit more towards a restaurant. They also do payroll services, which is uh worth mentioning.

You've got uh the company being co-founded by three people who used to uh work. Actually, two people used to work for um for oracle, which does a lot with uh software services. The goal really of toast the company says, is to digitize the restaurant experience, which you see this at even individual companies, and this is worth noting as well. Dave and busters, for example, they're making their own platform and they've released sort of their own payment processing platform.

So that when you sit down, you scan a qr code and then you check out sort of on the dave buster's website and go through their terminal and their sort of portals, which that's going to end up being one of the risk factors for toast that we'll Talk about here, in fact, i'll just give you a preview right now. They, on average, have about 1.7 restaurants for company per company that they work with, which that is a big red flag that you're really scaling towards smaller, more mom-and-pop potential. Restaurants, where you know maybe they've got one two or three locations as opposed to scaling into some of the bigger larger chains. However, that could also be a good positive indicator for a company like toast, because you're very well diversified and imagine if you were the processor for a company like cheesecake and then all of a sudden, you lost that contract.

You lost thousands of restaurants at once, but i do think that the big chains they're the ones who are investing in the technology to create their own payment processing systems again like dave and busters, does their own cheesecake has cake pay. They do their own. So maybe that's not even necessarily a bad issue for toast these companies they're just going to go with their own payment processors, it's really a small or maybe mom and pop restaurants that you're going for worth keeping an eye on so again. Their purpose is to provide turnkey solutions for restaurants, they're raising about 870 million dollars in cash for themselves.

Here they are. We've got about 400, just just under 500 million shares outstanding, which actually makes the math really easy for. When we look at the stock chart on this one, because when it's trading for about a 60 dollars, you could just multiply that by half essentially and then call a billion, and then you get about a market cap. So right now, we'd be at about a 30.5 billion dollar market cap.

It's about 10 billion dollars more than a firm, the buy now pay later platform. That's got a partnership with amazon. It seems a little little rich initially, when you think, oh, my goodness, uh the the restaurant, the mom and pop restaurant payment processor is selling for a 30 billion dollar valuation, but that is uh is what it is right now about less than 10 percent of their Revenue comes from subscriptions a good chunk of their revenue closer to 40, which will pull up. Those numbers right in just a moment comes from actually being the payment processor uh, and this is uh.

This is kind of being that that terminal where they get a 2.69 fee anytime. Somebody swipe in that credit card or debit card to pay, so payment processing, big portion of their income right now, they've got 20. Here's the number 29 000 customers with 48 000 locations, which shows you that uh you're you're really that you're. Let's do, let's do the math here, really quick, let's just do 48 000 divided by 29.

That puts you at yeah. I i had. I said earlier about 1.7 puts you at about 1.65 restaurants per customer that they have annualized recurring revenue at 494 million. This is a really important metric that you want to look for, especially in software service companies.

Usually these companies - they don't make a lot of money off the hardware they're making money off the fact that they're processing payments and then they're trying to make money on those subscriptions as well. The company is still losing money. It is it's a smaller company. It's worth noting that it's selling for about 21 times uh their well.

Actually, let me pull up the numbers here, just to just verify, we'll go through them here together really quickly. So take a look at this. This is the s1 for uh for toast and i'm going to compare parts of this in just a moment here to square. So let's do this together here, let's go ahead and pull up their uh, their specific revenue sheet.

Give me one second to get to it here. Ah, i misplaced it hold on give me one second, so uh we're going to pull up the revenue, and specifically what i want to do is i want to compare their transactional revenue so that we can get a good look and compare this to um to square And so here's square here's the transaction revenue for square just so you can get an idea. We're going to look at the six months ended in on june 30th for square we're gon na. Do a similar look here before uh toast so for the six months ended june 30th for square we're at about two point: almost 2.2 billion dollars of transaction based revenue, and you can see it's a pretty high margin here at square.

So at about uh 1.22. Is the cost divided by 2 187 looks like you've got costs of about 55 percent, so margin of about 45 on transaction based revenue at square and we're going to go ahead and compare this to the revenues that we've got over here. Six months ended june 30th. For they call transaction based revenue, financial technology solutions, and so here you can see financial technology solutions are about 579 mil.

So obviously a for about a fourth of what uh square is doing, which makes sense. It's a much smaller company and their profit isn't as high. Yet uh compared to a company like square, remember, square's, taking about 45 of that transactional revenue to the bottom line over here. We're closer to let's divide this here, really quick, just to get a percentage, we're closer to 22 coming to the bottom line on those transactional based revenues, so a little lower margin.

Uh we've got a lower scale, but uh of certainly amount of uh transactional revenues. 579 million, if we were just the value of the company solely off of off of this at an annualized rate. Let's do that. Let's do 580, let's say times: two that'd be about 1.16 billion of transactional based revenues right now, they're selling for about 30.5 billion dollars.

That would put you at about 19 times. Their transactional revenue is approximately what they're selling for ignoring like hardware and subscriptions the reason i'm specifically ignoring. That is because, over at square, you got to keep in mind. You've got things like bitcoin revenues.

You've got hardware revenues which are a loss leader for both square and toast and uh 21 times transactional revenue uh. If you take that same annualized number here, that'd be about 4.2 billion dollars for square square's got a market cap of about 120., so 120, divided by 4.2, puts you about 28. So, if you're, actually on a transactional side, you're paying more at square than you are for toast just for those transactions now total revenue is a lot higher at square, but you've got to be careful at square because look at this a lot of the revenues that Are coming in to square are coming in from bitcoin revenue and you'll notice. Here, bitcoin revenue might be 6.2 billion dollars, but bitcoin costs are 6.1 very, very, very low margin.

So looking at this actually from transaction based revenue you're paying a lower multiple at toast. I i will say: 30.5 billion dollars still seems incredibly expensive for for a restaurant payment processor, that's that's not going after larger chains, but then again hey. You know neither is square square's not trying to go after, like the macy's of the world they're trying to get into all those small businesses so worth keeping an eye on this. We've got some other things to cover here.

In just a moment. Uh the stock is uh, did oh technically, it was supposed to ipo at 40. This is strategic. Generally you'll you'll see these sell for anywhere between 50 to 80.

Above that it is up about 50 right. Now, though, it is off, of its highs, did run to a high of about 65.97 still think again, a little bit rich on valuation side, but comparing to square hey square's, not exactly a cheap, cheap one either. So, let's go through some of the other things that we're seeing here. One thing that i found very interesting when i first went through this this s1 here or their public filing is they're spending a lot of money on sales and marketing, but they're growing at a faster rate, so watch this they had uh in the first six months Ended at june 30th, so the first six months of this year.

They got about a total of 703, a million in revenues and they spent on that uh. Just about 10. They spent 73.8 divided by 703, so they spent about 10.5 percent on their on their marketing. To get to the 703 in revenues they have now previously uh.

If you go to the year, ended. For example, 2019, you had 129 million of marketing expenditures and revenue of 665 for the year, so you were spending about 19.3 percent on marketing so that either their marketing's gotten a whole lot more efficient or they've become a lot more um, like known in the small Business community to or potentially they're getting just more recurring revenues. It's the other thing too right. You sell the machines in 2019, you get more terminals in it takes time to get these terminals in so their marketing dollars appear to be going further now, but this also does make sense for a subscription-based company, and this is very common.

What you find with subscription-based companies is, the goal is just lose as much money, basically as possible up front, so you can acquire more customers and and then you could essentially keep keep growing. That annual recurring revenue base, which right now is around 500 mil, which is really incredible so hardware they lose money on their hardware very normal. It's essentially a loss leader subscription services are very profitable. This would be like inventory management or payroll services.

This makes sense. The more of these they can sell the more they can get like three x, the profit margin right because look you're getting 68 million dollars in subscription services and you're only. It only costs you about 23 million to run that as the company scales in revenue. This will grow now, uh in terms of uh.

We can't really do like an eps. We could do projections in terms of uh growth rates, which we don't. I don't know that we have forecast right now, we'll do a peek around to see if we have any kind of forecast, uh or any kind of guidance in terms of where they expect to go. But let's peek around a little bit more at some of the highlights of the company just so we can get a little bit of a better understanding as to what we're looking at here.

So uh. You know at the beginning one of the reasons i do so. I mean usually, i discard kind of the charts that they're showing you, but one of the things i like looking at when you look at some of the earlier portions uh in the uh s1s. Is they let you know what's important to their company, so you've got a little bit of a backstory here in the s1 they talk a little bit about the industry, talk about covid and the reopening the opportunity how many restaurants they could really get into.

I would be careful with this: how many restaurants they get into, in my opinion, is a little bit misleading or this total addressable market, because they're not going to get into the big retailers uh the dave and busters the cheesecakes or whatever these folks are making their Own proprietary uh platforms here so uh, this omni channel experience. This is very similar to what square does where. Essentially they can do that inventory management? You could sell in-store online right, that's very important across channels super useful. I love comparing them to paypal their point of sale machines by the way which i think is cool, also accepts uh or creates gift cards gift cards by the way great way for restaurants to make money, especially since gift card redemptions are always like 85 to 90.

So it's kind of like or sometimes even less so it to me it's kind of like getting free money, because you know you sell a thousand dollars of gift cards, you're, probably only going to have to provide like 850 to 900 of services uh. You know those leftover, pennies and dollars never really get redeemed uh on gift cards, which i think is incredible, but yeah increasing the adoption of the full suite of products. This is something that is really a profit margin driver, but the biggest driver is how can you get more customers right now and then that comes over time? That's always. The goal of a company is to try to get customers spending more money.

The customers that you already have the problem with that is it's very difficult to do that. Uh. It takes time uh it takes more selling sort of the upselling. That's it's effort right, uh, okay, so uh! Let's, let's see what we can learn here, so we've got annualized recurring, run rate uh to calculate the metric.

Okay, let's see, and we want to design quick fees, okay, so free cash flow. We got some free cash flow about 38.8 million dollars. Risk factors we're gon na risk factors are useful, may not be able to sustain their growth, so this would be useful. We might be able to get some guidance here all right.

Let's look at this here. So in the years end of 2019 and 2020, our revenue was 665 and 823 million dollars representing a 24 growth rate in the six months ended june 30th and uh in 2020 and 2021. Our revenue represented a 105 uh. Well uh! You can't you can't do this see this, you have to be careful.

Some of these, in my opinion, are misleading their revenue. Obviously, in 2020, um is going to be a lot lower than uh and you're, comparing into a hole right, so i think it'd be uh. More effective to take half of 2019 and say in 2019, you went about a 30 uh, 330 million dollar six month. Uh growth rate 330 to 703 in two years is what you're trying to do right.

So if i just do 330 uh times - oh, i don't know: let's go with like a 1.4 and a 1.4. Let's do that twice here: yeah there we go we're getting pretty close 40 yeah, it's like a 47 uh growth rate, yeah closer to about 46 growth rate. All i'm doing here is i'm taking the 2019 first six months, just dividing in half here, multiplying by about 46 for two years to get to 2021, which is where our revenue is approximately now uh for the first six months of the year - and this is a Rough estimation, but it shows you about a 46 growth rate, is what they've had uh yeah, hey, that's bigger than the growth rate they had between 2019 and 2020, but again it's hard to compare to 2020., okay, 2020 as a whole. So you really want to try to get out of that.

But hey you know if the company grew at uh at even 30 uh, you know for the next few years. I think that's great because, let's let's do that here quickly, if you're at 1.4 annualized for the year and you grow at one point, three percent for twenty uh say that's 2021, 22, 3 and four you'll be a a three bill in revs by uh. 20. 24..

You should be profitable, then, especially if you can, you could reduce some of these. These um costs as a percentage of what they're spending we're on a good trajectory with sales and marketing, and i would expect they'll at some point be able to start slowing down on research and development. The fact that they're still spending 10 of their revenue on r d - i mean it's not unusual - to spend 10 to 15 on r d, but they're spending a lot. I mean they're at an annualized rate of almost 150 million dollars here on r d, uh and and so hey, maybe they're, just always innovating for new products, which you kind of have to do in the tech space.

So maybe we'll we'll let that one fly. Let's see what else we have so uh, okay, let's see here, it's definitely going to be a company that you want to see a lot of growth in sometimes what i like to do is also take a peek at some of the trends like how many people Are looking for the toast pos, i think that might be worth looking at. So if we do like a quick little trend search here, let's see here toast pos see if anybody's looking that uh, it actually does show up with search results, which is good. You go over the past five years.

Yeah you've got a nice trend up here for the toast pos point of sale. Look at that toast pos support pricing pricing - that's always a great term to look for, although this is going to be a lot harder once you start getting too too specific, compare, let's say the toast pos to the square pos. Let's see how those search trends are uh, so over the past five years they kind of look like that. They somewhat been growing together, which is kind of good.

The fact that uh, that the the comparisons here are so close is impressive. Yeah look at that. That's impressive that we're so similar here on the trends or they're, looking at toast being a pos yeah. I don't know about that.

One: okay, let's uh! Let's see what else we can find uh in there their documents here so uh, again, uh on on a sales basis. I personally like looking at transactional based revenue and when you compare it to square they're, actually not too bad problem with square. Is they put all those bitcoin revenues in there? So if you use the the total revs uh, things get skewed a little bit all right. Let's see what other sheets we could find here, okay, a little bit longer as well.

It's an interesting here. We go net retention rate, we measure the annual net retention rate by an average earner. Okay for the year since 2015, our net retention rate has been 110. Basically, so what this means is they're they're growing how much they're selling to their customers rather than losing customers.

It's bad, if you get under like 90, because then you're losing customers. That would be your customer base churn and uh. In chronological order they were at 119. 122.

114. 110. 114. That's great! I mean this is very stable retention.

So that's good again. I question a little bit the valuation i think 30 billion dollars is a little bit on the high side, but uh people are very excited about uh, ipos right now as well, and sometimes that ipo euphoria is uh. You know so something to be mindful of how many people are trading it right, but this, i think, is not not something that i would really count heavily on here. As customers grow their businesses and open new locations, we expect to see corresponding increases in locations per customer.

Basically, i don't know about that. They got like 29 000 customers. There are 1.65 per customer right now i mean sure that would help, but i don't know if that's where the real growth is going to come from. I think the real growth comes from how many small businesses can you attract? How many small business restaurants are there? How many small business restaurants in united states that would be interesting? Let's take a peek at that, so restaurant levels, national restaurant association, so we have restaurant opinion.

Okay, here we go so restaurants temporarily apparently closed that doesn't help us i'd like to know how many there are total all right. Well, how many number of restaurants so total number of restaurants in the us 660 000. But what we really want to know is how many small business restaurants there are not chain, restaurants right how many small, what if i just put small restaurants in okay as of december 2019, there are more than 490 000 total independent restaurants in the united states. That number's probably shrunk through the pandemic, so even if you took 30 percent off of that number, that's that's still a good market that you can address so take off 30 percent.

Here, 343 000 uh potential restaurants, they're at 40ish thousand. I mean they're they're only. What is that eight percent 40 divided by 343? It's about okay, well, eleven point: six percent right, not eight percent! That's about 11.6 percent! That of market share, maybe small businesses that they've taken it's interesting. They've got a lot of growth or room to grow, but again, how much is it going to cost to get the small businesses? How much competition is there for those small businesses they're not going to get everybody right all right.

Let's see here, hardware costs hardware, they don't make money on hardware, i mean tiny little bit fractionally. These are year results for last year. We care more about the details here. So gna expenses increase 36 percent.

The increase is primarily due to allocated facilities and appreciation expense. Mostly related to one-time lease buyout transactions, so i like that anytime, you see large increases like large spikes in in one-time expenses. That's good for the future, because the future should then be more profitable, more liabilities. Here: 8.2 million dollars i mean, but all in all, not too much here as a percentage of their gna okay.

So, let's see if we can find anything particularly else, i made some notes for uh other notes here, but nothing, let's see here all right financing activities. Yeah, okay, a lot obviously to digest with toast but uh loan servicing activities. Specific. Okay, more disclosure share based compensation, disclosures portfolio, credit losses because they do loans as well for their customers, all right, so uh response to coverage and they've got their pamphlet over here.

Their competition that would be interesting is, i want to see what what they declare their competition. Let's pull that our competition here we go so see here. Other companies that you can compare to so uh primarily compete with square touch bistro and the clover network and the lightspeed pos so touch bistro. I wonder if they're public - probably not yet but there's a this is, was the concern that i opened up with for the company too hold on one second here: okay, so buy or sell touch bistro! Okay! This is just equity sense.

So it's still. It's still private uh, but you've got a lot of competition. Let's see here touch bistro clover. Let's compare the trends on touch, bistro clover, clover, network and, let's see here, touch bistro.

It's interesting to me touch bistro, pos, wow, that's tiny relative! I don't know. If i mean they have a pos touch bistro because that that almost seems off, let's see if they have a pos yeah, they have a pos and so does clover. Let's try, clover or intuit pos lots of competition clover, pos clover pos is pretty close. So that's a pretty big uh, a pretty big competitor into it, not even close, so clover, pos clover.

I wonder if they're public, i don't think they are. But let's see here, oh parent organization, fine, really, okay, so this phi serve here is uh. Is public and uh they they do a lot of the old pos systems as well and uh. The the company has been trying to evolve with clover to do more.

Modern pos systems, but fi serve was like the traditional old stuff, you'd see it like kohl's or the retailers. I wonder what ever is probably much lower, but their growth is also probably much lower i'll pull them up quickly. Here, uh. Let me see here bloomberg, microsphere and that's the thing is they're endless endless versions of these terminals, uh all right! That's why i wonder just the unique selling proposition of like a toast relative to some of the others to okay, here all right, i'm gon na pull this up and uh we'll wrap up with some closing thoughts on it.

Okay terminal coming up and, let's see, uh in the meantime, the stock itself on the toast, ipo, obviously the toast they always look like they're doing really well because uh they always under price them. But looking at the sticks, uh the sticks themselves. They are kind of doing a little bit of that sort of slow, bleed here, but uh hey ipo day, it's uh, it's normal. This is the minute chart.

This is what robinhood looks like on the day chart for what it's worth right. Uh. Okay, let's get! Let me get five serve really quick, so i just want to get their numbers because that i think is going to be an interesting comparison. It's a much.

It should be a much slower growth company, though, because they are they've been around so much longer, uh. Okay, so fi serve, has a 93 or sorry uh, 72 billion dollar market cap see they're they're only expected to grow at five to seven percent a year, they've got somewhere around 15 to 16 billion dollars of revenue, so much larger company. Nice margin, though, expected to be around 23 to 25 percent net income margin. So you got a profitable competitor here in phi serve, but i don't know if you could compare them just because you're not uh, you know you've got clover, but it's still going to be a smaller portion of their business.

That would be another company, though, that i would compare to if i was really looking at toast - and i was super interested in toast all right. Let's see what other information we have here, so all right freedom pay ip. Okay, all right! You know the rest is disclosures here: stock based compensation, so this gives us a little bit of a look into them. Look uh! I love what i'm seeing in terms of their ability to market themselves, love what i'm seeing in how they're getting more revenues per marketing dollar that they're spending.

I, like that uh, their their transaction based margin is nowhere near yet what uh square is taking home their 22 versus about 45 percent over at square. However, as as a you know, sales basis in terms of how much like their valuation work versus square just for transaction based revenue, they're much much better in that metric uh but uh, you know square square more broadly uh, certainly a much more stable company than i That i would say, but it's been around longer much larger company uh, who knows maybe maybe toast uh is - is a company that could end up holding a candle to something like uh square in the restaurant space, but specifically since they do niche down into restaurants. But your big risk factor is how many small businesses can you actually convert to a payment processor, one of the red flags that i actually think of as well is, if you have a net retention rate of 110 percent for these payment processors it it's a sign That you're able to continue to sell to your existing customers and really what you have is a land grab. You have a land grab, trying to get as many restaurants as you can to use your terminal.

But what i want to know is how difficult is it to take a small business restaurant that already has a terminal, like maybe they're, using clover they're using a different terminal? How hard is it to convert them? Are you going to have to substantially ramp your advertising rate to continue to get the same kind of growth? To me? It's too competitive of a space, and i get nervous over the fact that it's going to take a lot to rip somebody away from a different payment servicing company. If they already have a payment servicing company they're going to have to be very discouraged with cloud-based servicing by the other companies, so that makes me nervous. I feel like now we're kind of like in the easy land grab, and sometimes i wonder like - are we ipoing? Now, because the easy land grab is slowing it down, but hey at the moment, their growth is still running, so maybe not, but that's what i would be paying attention to at toast is. Can we really justify a 30.5 billion dollar valuation when we've got a company that is, is in the land grab for for positions uh in restaurants, they're, not appealing to chain restaurants, because the chain restaurants are making their own? How many restaurants can we really get? We calculated about an 11.5 market share, but how many? How many small business restaurants right now are already using a smart or should i say, cloud-based pos versus how many more can we actually get and then when we have to get into the converting phase? And so that's a risk factor for me uh.

I don't necessarily see a crazy, unique selling proposition of toast versus maybe like a clover or the other. So i imagine a lot of these things will come down to nuance and i think that kind of explains why the search trends for like the square, pos, the toast, pos the clover pos. These are all relatively similar. Now, in fairness, when you type in square pos, you're, comparing to all sorts of uh payment processing terminals, whereas people typing in the toast pos are really just specifically looking for uh toast uh same thing with with clover, you can use clover for small business uh, whereas Toast you're really just using for restaurants, so i certainly would say they're, probably one of the leaders in restaurants for small businesses but uh the competition galore in the space, so uh uh, yeah, yeah anyway, uh.

So, okay, folks uh right now, it's an island grab. The land is shrinking, oh no uh anyway. So these are some of my thoughts. I think it's very high for what it is and uh it's not something that that i would buy.

I don't want to bag on the company, though i'm sure they do great things. I'm sure their terminal is beautiful and does great work, but i think there's a lot of hope getting built into this. I mean, even if just very quickly, to leave off on this. On sort of a a very rough projection, say we got to three billion dollars of of rev uh and they were able to bring fifteen percent to the bottom line.

Okay, five serves at like twenty three percent uh fifteen percent would be a lot by twenty twenty. Three: four for them to bring the bottom line: let's just do a quick little look at that 15 percent would be about 150 mil uh 10. No, i'm sorry it'd be about 450 million dollars, 450 million uh divided by in 20, 20 20 2024. We've got 499 shares, uh 450 divided by 4.99.

So if they grew at a 30 clip, they got to 3 billion revenue and then they were able to take 15 to the bottom line. You would be getting about which at 60 uh divided by 90 cents per share you're, paying about 66 times for 2024 revenues. Uh. You know for a payment processor in a very competitive space, with my opinion, not like the biggest moat, uh and and the shrinking kind of potential land grab.

That's a it's a little rich uh. You know. Would i pay 45, maybe uh. You know 40 45 times that'd, probably be somewhere around like 42 bucks, or something like that.

You know that's, probably where i'd be a lot more interested, which, oh, ironically, just realize, that's actually kind of where the underwriters priced the thing too, at forty dollars for ipo. So some of my thoughts, thank you folks, so much for watching my thoughts here on toast. I hope you appreciate it and folks we'll see you next time.