1 Growth Stock Down 42% to Buy Right Now

Toast (NYSE: TOST) isn't a consumer-facing company, so even though you might have interacted with its platform, you wouldn't necessarily know it.

If you're a growth investor, though, you should get to know Toast. It's an exciting, disruptive company with a quirky name and a popular product, capturing the interest of money managers like Cathie Wood. Toast stock soared after its excellent third-quarter earnings report last week, but it's still 42% off of its all-time highs. Here's why you should take a look.

The toast of the restaurant industry

Toast is a connected, digital platform for the restaurant industry. It provides all kinds of hardware and software to improve restaurant management. Think of it like this: It's a complete restaurant solution that unites all of a customer's operations, so payroll, inventory, menu, accounts payable, mobile ordering, and everything else work together in one place. Clients that use Toast's services have seen a 90% reduction in hours to run payroll and a 15 percentage point increase in orders delivered in under 10 minutes. It's easy to see why this is attractive for restaurants, and the platform is growing rapidly.

Toast added 7,000 new locations in the third quarter, adding up to a 28% increase year over year for a total of 127,000. Annualized recurring run-rate, which is its preferred top-line metric, increased 28% year over year to $1.6 billion.

Those were strong numbers and are a continuation of Toast's growth story. But what was unusual in the report was the big win in profitability. Operating income improved from a $59 million loss last year to positive $34 million this year, and a $31 million net loss last year swung to positive $56 million this year. It beat Wall Street expectations for earnings per share (EPS) of $0.01 with reported EPS of $0.07.

A huge opportunity

Toast has about 14% of the market right now, and it's a big market. The restaurant industry is one of the largest in the country, with $1 trillion in annual sales and growing, or 4% of the gross domestic product. The other 87% or so of the market, though, isn't necessarily going to Toast's competition; they're locations that are still using legacy systems and haven't yet gone to the cloud.

Toast's mission isn't to grab away market share from competitors that offer similar benefits. There are some of those, of course, but the main mission is to get locations out of old, outdated systems and into its cloud-based, interconnected ecosystem. That's going to happen organically, and with its stellar platform and dominant position, Toast will benefit from the shift.

It's also expanding vertically, adding features and developing solutions for different types of clients. It already offers different interfaces for different types of eateries, like bakeries, pizza shops, and fine dining, and now it's going after the grocery market with a product called Toast Food & Beverage Retail. That opens up an entirely new segment and growth opportunities.

The company is also expanding internationally, which will be a further growth driver in the years ahead.

Risks and valuation

Toast is surmounting its biggest risks, which are profitability and competition. Investors need to see more quarters of profits before determining that Toast can run profitably, but this is an excellent start. It's figuring out how to become more efficient and leveraging its digital, asset-light platform to scale. As for competition, the more locations sign up for service, the more it's holding its own versus similar services like Block's Square seller's business. But Toast is still young and growing, and these are the issues to look out for.

The other important factor to temper market enthusiasm is valuation. Toast stock jumped 18% after the phenomenal earnings report, and it trades at a forward one-year P/E ratio of 45. That's rich, but it's not out of bounds for a growth stock. Toast stock gets a premium for its strong performance as well as its profitability.

The long-term opportunity is compelling, and Toast stock looks like a buy at this price as long as you have some appetite for risk.

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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Block and Toast. The Motley Fool has a disclosure policy.