As a growth investor, I’m constantly looking for the best stocks to buy. And one of my biggest successes over the last decade has been Shopify. I first invested in the e-commerce giant as early as 2017, earning over a 2,000% return. But while I’m bullish on this enterprise, I think the days of quadruple-digit gains might be behind it.
Obviously, that’s sad news for investors who are only just discovering this top-notch company. However, there will always be another stock that delivers Shopify-like returns. And I think I may have just found it.
In fact, my conviction on this idea is so strong that when I bought shares last week, I doubled my usual starting capital investment. So with that said, let’s talk about Toast (NYSE:TOST).
What’s Toast?
Toast is a cloud-based, software-as-a-service platform that serves as the operating system of modern restaurants. On the surface, it looks like just another Point of Sale (POS) system. However, in addition to its payment processing capabilities, the firm’s technology connects front- and back-of-house operations.
Beyond the usual accepting of orders at the counter or tableside, Toast enables online ordering, QR code menu scanning, real-time menu changes, multiple location management, ingredient price tracking, menu costing, self-service kiosks, AI-powered sales analytics, loyalty schemes, seamless integration with third-party online platforms, gift cards, e-mail marketing, access to a network of on-demand delivery drivers, even direct access to financing through its banking partners.
For Shopify shareholders, a lot of these features should sound familiar as the platform offers a very similar equivalent product suite for the e-commerce space instead of restaurants.
The next Shopify?
There are a lot of POS solutions around today, even in the restaurant niche. So what makes Toast so special? A big part of its competitive moat boils down to its technology. Looking at customer reviews, rival solutions don’t seem to come close in terms of capabilities, extensiveness of features, and ease of use.
So it’s not surprising the company’s already captured 15% of the US market. But while the software brings customers in, it’s the gross payment volume (GPV) that drives Toast’s revenue stream. With a small fee charged on each transaction, 82% of sales come from its payment processing solutions – another similarity with Shopify.
Thanks to rapid location expansion from less than 30,000 in 2019 to 127,000 as of September, GPV’s been growing at a 40% annualised rate, reaching $126bn in 2023. In turn, that’s translated into 42% annualised revenue growth over the last five years. And to top things off, it’s just turned profitable.
Of course, no investment’s ever without risk. Fierce competition means management has to continuously innovate its technology to stay ahead of the curve. And its dependence on transaction volume to drive sales and profits means Toast’s sensitive to economic downturns.
However, with an already dominant position within a highly fragmented US market and the recent launch of international expansion to Canada and the UK, Toast has barely scratched the surface of its long-term 15 million global location market opportunity.
With a market-cap of just $22bn, I think Toast has enormous Shopify-like growth potential. That’s why I just bought it.
