Is Toast Stock a Buy, Sell, or Hold in 2025?

Shares of Toast (NYSE: TOST) quietly climbed by about 100% in 2024, a breakout year for the restaurant management software innovator. The optimistic outlook for its future is premised on its recent strong growth and a shift toward consistent profitability. Its headline numbers have been impressive, but will they be good enough to keep the rally going?

The case to buy or hold Toast stock now

If you've dined out recently in the United States, there's a chance that the restaurant you chose was already using Toast's technology platform. Beyond offering point-of-sale equipment and food ordering systems for dining establishments, Toast stands out with its all-in-one solution.

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Its platform seamlessly integrates a reservations system, order management, kitchen operations, inventory control, payments, back-office accounting, and human resource tools. Features such as social media integration, white-label loyalty programs, and an intuitive interface have propelled its rapid adoption across the dining industry.

The company's operating and financial trends have been phenomenal. In the third quarter, Toast products were used by 127,000 restaurant locations, up 28% year over year. Through the subscription-based business and monetization of payments transaction volume, annualized recurring revenue rose 28% to $1.6 billion. Its top-line tailwinds had an even greater impact on net income. Its Q3 adjusted earnings of $0.07 per share reversed a loss of $0.09 per share in the prior-year period.

Image source: Getty Images.

Toast's momentum shows no signs of slowing. Wall Street analysts expect revenue expansion of 28% in 2024, followed by 24% growth in 2025, while earnings are forecast to surge to $0.89 per share for the year ahead.

Management points to expansions in its capabilities -- including specialized products for event catering, hotels, and the broader hospitality industry -- as expected growth drivers. The company has also barely tapped the international market: Just 2,000 restaurant locations outside the United States are using its services. Toast intends to capitalize on that opportunity with an upcoming push into new countries such as Canada and the United Kingdom.

The bullish case for the stock is that the company has room to outperform analysts' current expectations, particularly as macroeconomic conditions remain resilient. Investors confident Toast is still in the early stages of exploiting a significant long-term opportunity have a great reason to buy and hold the stock now.

Data source: Yahoo Finance. YOY = year over year.

The case to sell Toast stock now

There's a lot to like about Toast -- it's a compelling growth stock supported by overall solid fundamentals. Still, before getting too excited about any stock, it's a smart idea to take a step back and think about what could go wrong.

One key challenge Toast faces is a highly competitive and fragmented landscape. Multiple companies offer similar cloud-based restaurant management software, and they're more than capable of replicating any novel features from the Toast platform that might have been disruptive. Toast has scaled up its customer base to an estimated 13% of its current addressable market, but it's unclear whether it will be able to replicate that early success in its next phase of growth.

The other consideration is that shares of Toast are trading at a forward price-to-earnings ratio (P/E) of 30, based on analysts' consensus for 2025 earnings. This valuation appears pricey, at least next to peers like Shift Four, Block, and Lightspeed Commerce, which trade at an average forward P/E closer to 20. Toast's stronger growth may justify an earnings premium, but it's difficult to suggest the stock is materially undervalued.

The biggest risk for Toast's shareholders is that it might deliver disappointing quarterly results, especially given the high expectations baked into its valuation now. Investors concerned about Toast's ability to differentiate itself and maintain its growth trajectory might want to stay on the sidelines if they don't already own it, or consider selling the stock if they do.

TOST PE Ratio (Forward 1y) data by YCharts.

Decision time

I'm bullish on Toast stock and view it as a compelling addition to a diversified portfolio. This is a classic case where investors should stick with a winner, as the market tends to reward industry disrupters that have room to consolidate market share. Patient shareholders should be well rewarded as the company maintains its strong growth trajectory.

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Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Block, Shift4 Payments, and Toast. The Motley Fool recommends Lightspeed Commerce. The Motley Fool has a disclosure policy.