Motley Fool Money: What’s Cooking at Toast
Release Date: February 20, 2025
Hosts: Mary Long, Tim Byers, Kirsten Guerra

1. Introduction

In this episode of Motley Fool Money, host Mary Long sits down with investment analyst Tim Byers to discuss the recent developments and financial performance of Toast, a leading provider of restaurant management systems. Later in the show, analyst Kirsten Guerra joins the conversation to provide insights into Roblox's performance and strategic initiatives. The episode also touches upon a breakthrough in quantum computing by Microsoft researchers.

2. Deep Dive into Toast

a. Understanding Toast's Value Proposition

Mary Long initiates the discussion by highlighting Toast as one of Tim Byers' highest conviction stock picks. Tim delves into the core problem Toast addresses for restaurateurs:

Tim Byers [01:20]: "If you are a restaurateur with multiple locations, managing inventory, staff turnover, menu changes, and delivery logistics can be overwhelming. Toast offers an integrated system that handles all these aspects, allowing restaurant operators to focus on delivering great food without the hassle of managing complex infrastructure."

b. Financial Performance and Earnings Report

Tim provides a comprehensive overview of Toast's latest earnings, emphasizing robust growth and improved profitability:

Tim Byers [03:33]: "Overall revenue grew by 29.15% year-over-year, with subscription revenue up almost 41%. Their fintech revenue, derived from payment processing, increased by 28%, leading to a gross profit growth of 35% year-over-year."

Notably, Toast achieved a significant milestone by becoming GAAP profitable for the first time, reporting a net income of $19 million while adding approximately 28,000 net new locations.

c. Wall Street's Reaction and EPS Miss

Despite the strong financials, Wall Street's reaction was muted due to an earnings per share (EPS) miss:

Tim Byers [06:26]: "They reported roughly 6 cents per share in earnings, missing the 17-cent estimate. However, I don't place much emphasis on EPS figures for growth companies like Toast, where share counts can fluctuate significantly due to equity issuance."

Mary notes that Toast's stock experienced a minor decline post-earnings release, but Tim reassures that the EPS miss is not a major concern given the company's growth trajectory.

d. Product Features Driving Revenue Growth

A standout testimonial from Wayne Carrington of Rock and Ramen underscores Toast's impact beyond backend efficiencies:

Wayne Carrington (testimonial [09:16]): "With Toast, average check size is up 15%, translating to an additional $120,000 a year when we're at full capacity."

Tim explains that Toast's customizable point-of-sale (POS) systems empower restaurants to highlight profitable items, thereby increasing average check sizes:

Tim Byers [09:18]: "Toast's POS allows restaurants to feature high-margin items prominently, driving higher sales without additional backend complexity."

3. Microsoft's Breakthrough in Quantum Computing

Mary shifts the conversation to a groundbreaking development in quantum computing reported by the Wall Street Journal:

Mary Long [11:03]: "Microsoft researchers have created a chip leveraging a new state of matter called a topological superconductor, which could serve as the foundation for more stable and predictable quantum computers."

Tim provides an overview of the significance of this innovation:

Tim Byers [11:21]: "A topological superconductor introduces Majorana bound states at the material's edges, enhancing predictability in quantum systems. While this advancement is promising for quantum computing's future, it's still in the early stages and not yet commercially viable."

He further elaborates on the potential impact of stable quantum systems on AI and computational capabilities, noting that while exciting, practical applications may take time to materialize.

4. In-Depth Analysis of Roblox with Kirsten Guerra

a. Overview and Differentiation

Kirsten Guerra (referred to as Dave in the transcript) discusses Roblox's unique position in the gaming industry:

Kirsten Guerra [19:32]: "Unlike companies like Microsoft or Nintendo that develop their own games and sell hardware, Roblox operates as a platform where users create and monetize their own games. This model is akin to YouTube, where creators drive the content."

b. Financial Performance and Key Metrics

Mary highlights Roblox's strong fiscal 2024 results, prompting Dave to provide context:

Dave [21:30]: "While Roblox reported impressive revenue growth—32% YoY in Q4 and approximately 30% for the full year—it's essential to consider sequential performance. Q4 saw a 4% drop in daily active users, partly due to a ban in Turkey, raising questions about sustainable growth."

c. User Demographics and Growth Strategies

Roblox is actively working to broaden its user base beyond younger audiences:

Dave [24:45]: "Over 61% of Roblox's daily active users are over 13, and this segment is expanding. The platform encourages the development of genres like sports and action to appeal to older users and enhances its discoverability algorithms to present relevant content."

d. Child Safety Concerns and Hindenburg Report

Addressing past criticisms, Dave provides insights into Roblox's safety measures:

Dave [27:20]: "Roblox invests heavily in trust and safety, spending $915 million on infrastructure and partnering with initiatives like Roost for open online safety tools. These efforts are crucial given Roblox's immersive and highly interactive environment."

Regarding the Hindenburg Research report on alleged inflated metrics and child safety issues:

Dave [28:49]: "While Hindenburg has a history of credible reports, it's important to weigh their claims critically. Roblox has robust mechanisms in place for safety and content verification, but investors should consider these allegations within the broader context of the company's performance and responses."

e. Stock-Based Compensation and Financial Health

Mary raises concerns about Roblox's financial practices:

Mary Long [22:52]: "Roblox is spending more on stock-based compensation than it's generating in operating cash flow. Is this a red flag?"

Dave [23:14]: "Stock-based compensation has been a recurring concern, contributing to significant dilution of shareholder value. While it's a useful tool for rewarding employees in a growth phase, the increasing dilution rate—now at 4.4% annually—is something investors should monitor closely."

5. Conclusion

The episode provides a thorough examination of Toast's impressive financial growth and strategic advantages in the restaurant management sector, despite a minor EPS miss that doesn't significantly impact its long-term potential. Additionally, the discussion on Roblox highlights both its innovative platform model and the challenges it faces in user growth sustainability and financial management. The brief overview of Microsoft's advancements in quantum computing adds a layer of technological insight, underscoring the diverse range of topics covered in this episode.

Listeners are encouraged to conduct their own research and consider the insights shared by the analysts when making investment decisions.

Notable Quotes:

• Tim Byers [01:20]: "Toast offers an integrated system that handles all these aspects, allowing restaurant operators to focus on delivering great food without the hassle of managing complex infrastructure."

• Tim Byers [03:33]: "Overall revenue grew by 29.15% year-over-year, with subscription revenue up almost 41%."

• Tim Byers [06:26]: "I don't place much emphasis on EPS figures for growth companies like Toast, where share counts can fluctuate significantly due to equity issuance."

• Tim Byers [09:18]: "Toast's POS allows restaurants to feature high-margin items prominently, driving higher sales without additional backend complexity."

• Mary Long [11:03]: "Microsoft researchers have created a chip leveraging a new state of matter called a topological superconductor."

• Dave [21:30]: "A 4% drop in daily active users could either be a temporary dip or the start of a concerning trend."

• Dave [24:45]: "Over 61% of Roblox's daily active users are over 13, and this segment is expanding."

• Dave [23:14]: "The increasing dilution rate—now at 4.4% annually—is something investors should monitor closely."

For more insights and detailed analyses, tune in to the latest episodes of Motley Fool Money.