Grill (TOST -1.80%) is a restaurant technology company offering products for processing payments, taking orders, and more. And a year from now, Toast stock will likely be trading higher than it is today.

Revenues are growing at over 20% per year and management is demonstrating that they know how to run a profitable business. Both of these things are pretty encouraging, but there’s one more thing that makes me even more optimistic about this company’s long-term prospects.

Don’t overlook this adoption trend with Toast

In the second quarter, approximately 8,000 new restaurants began using Toast’s technology. Sure, the second quarter is typically a good quarter for the company, but this is a record number of net new locations. And this answers a major question that shareholders were asking.

In 2023, Toast launched new fees that outraged customers, leading management to quickly reverse its decision. But there are other restaurant technology companies, and shareholders have questioned whether Toast made a misstep and drove users away from its platform.

Given the record number of net new placements in the second quarter, it appears that Toast hasn’t suffered too much damage to its reputation. That said, there are good reasons to believe that its growth rate could accelerate.

When Toast reaches 20% market share in a specific market, management calls it a flying market. It seems its existing customers are becoming brand evangelists in these flying areas. Simply put, the company has seen higher adoption rates, lower expenses, and consequently, higher profits in the flywheel markets.

As of 2021, Toast had 20% or more market share in just 5% of U.S. markets. By 2023, this figure has increased to 31% of U.S. markets. And that continues to climb in 2024, according to management.

The company has only 13% market share in the entire United States, but more and more markets are reaching a tipping point where it becomes easier to take more share.

Thinking about it from a global perspective, Toast appears to be poised to claim a huge percentage of overall revenue. restaurant area in the United States, meaning the company could have many years of growth ahead of it.

More than just growth

For some time, I have believed in the growth potential of Toast. I was skeptical of its financial results, but this company is proving me wrong in real time.

Toast provides hardware devices to its customers at a gross loss, and payment processing has a low margin. In contrast, its software subscription products generate a high margin. That’s great, but it takes time for the software’s profits to become large enough to offset losses elsewhere in the company. However, as this chart shows, Toast’s gross profit margin has increased recently as incomes soar.

Data by Y Charts.

The aforementioned flywheel effect that allows Toast to save on sales and marketing expenses further drives operational efficiencies.

So, on the one hand, Toast’s improving profitability is a natural byproduct of its growth, and on the other hand, management is taking other steps to improve its bottom line as well. General and administrative (business) expenses decreased 22% year over year in the second quarter.

With revenue growth, increasing margins and disciplined management, Toast has just released its first quarterly report. operating profit like a publicly traded company. Its second-quarter operating profit of $5 million may be modest, but it’s a step in the right direction.

Toasts free cash flow per share is also growing at an impressive rate, as you can see below.

Data by Y Charts.

Looking towards 2025 and beyond

With Toast, investors are presented with a profitable growth opportunity that could very well gain momentum in the coming year. And looking at the stock, it’s trading at a reasonable valuation of less than 4 times sales. This sets the stock up for gains as the trading momentum continues.

For those looking to buy Toast stock today, it could have upside potential over the next year, but there’s something to keep in mind: it could take more than a year to come to fruition.

The research firm Boston Consulting Group published a long-term study in 2006 that found that assessment has moved the price of a stock more than anything else in a single year. But over three years, growth has been the main factor in a stock’s rise.

Valuation is largely determined by investor sentiment, and a number of factors can have both a positive and negative impact on sentiment, making forecasting difficult. Therefore, Toast stock may not rise over the next year if investor sentiment lowers its valuation.

Fortunately, the valuation is already reasonable in this case. If growth continues over the next three years or more, Toast’s patient shareholders should be rewarded.