Toast Q3 23’ Investment Thesis Update

Executive Summary

Thesis I: Toast has Immense Growth Potential from Continued Restaurant Expansion

Remarkable Growth: 45% revenue increase and expansion to 93,000 locations.
Localized Marketing: Effective in-person marketing strategy targeting SMBs.
Innovative Product Launches: Diverse products catering to different market segments.
Strategic Partnership with Marriott: Demonstrating Toast's versatility in restaurant settings.
Product Utility: Addressing the needs of the fragmented U.S. restaurant industry.
Bridging Technological Gaps: Modernizing traditional restaurant operations.
Market Potential: Significant growth potential with strategic initiatives and innovative products.

Thesis II: Monetization still has Significant Potential from Spending and Subscription Growth

Revenue Growth: Driven by subscription services and payments.
Market Penetration: Surge in Gross Payment Volume due to expanding clientele.
SMB and Mid-Market Segment Focus: Utilization in various business sizes.
International Expansion: Positive feedback in new markets.
Product Innovation and Strategic Growth: Surpassing $1 billion in ARR.
Adapting to Industry Fragmentation: Effective customer acquisition in a fragmented market.
Revenue Distribution: Evolving business model with a focus on recurring revenue streams.

Thesis III: Massive and Expanding Restaurant Technology TAM

Shift to Cloud-Based Systems: Moving from legacy to flexible cloud-based platforms.
Growth and Technological Renaissance: U.S. restaurant industry projecting a 10% sales increase.
Technology Investment Priorities: Emphasis on POS, payment processing, and guest interaction tools.
Future Focus on Technology: Innovation crucial for market differentiation.
Restaurant Sales Surge and Tech Adoption: Increasing technology spending.
Driving Forces Behind Tech Spending: Factors like job growth and rising labor costs.
Payment Processing as a Beneficiary: Dual role accelerating technology adoption in the industry.

Toast's strategic advancements, product innovation, and successful penetration into the restaurant technology market position it for substantial growth. The company's potential is significantly higher than what is currently reflected in its stock valuation, primarily due to an excessive focus on short-term narratives. As Toast continues to expand its footprint and innovate, its true growth potential is expected to align more closely with its market valuation, unveiling its full business potential.

Thesis I: Toast has Immense Growth Potential from Continued Restaurant Expansion

Thesis Summary

Impressive Growth and Expansion:
- Toast achieved a 45% year-over-year revenue growth, reaching $978 million and added over 7,500 new locations, expanding its total footprint to approximately 93,000 locations. This reflects Toast's potent business model and significant untapped market opportunities.
Localized Marketing Strategy:
- Toast’s localized approach and focus on Small and Medium Businesses (SMBs) involve proactive, in-person marketing, which has been effective in gaining market share over legacy vendors. This hands-on strategy addresses the unique challenges of small businesses and introduces them to modern solutions.
Innovative Product Launches:
- Toast introduced specialized products like "Toast for Hotel Restaurants," "Toast Tables," and the "Catering & Events" product. These offerings target different segments of the Total Addressable Market (TAM) and demonstrate Toast's capability to meet diverse industry needs.
Strategic Partnership with Marriott:
- The partnership with Marriott Select Service Hotels to implement "Toast for Hotel Restaurants" technology highlights Toast's ability to cater to a wide range of hospitality and food service operations. This demonstrates the versatility of Toast's solutions in both traditional and non-traditional restaurant settings.
Product Utility and Industry Fragmentation:
- Toast's success is attributed to its utility for restaurants of all sizes, especially considering the highly fragmented U.S. restaurant industry. Toast's technology offers practical solutions for optimizing operations, digital payments, and online ordering systems.
Adaptation to Technological Gaps:
- Toast bridges the technology gap in the restaurant industry by offering advanced solutions tailored to modernize traditional operations. This positions Toast as both a product provider and an influencer in the industry's future direction.
Market Potential and Future Outlook:
- With a large, fragmented market and a focus on expanding its customer base, Toast has significant growth potential. Its strategic initiatives and innovative products position it well for continued expansion and market influence in the restaurant industry.

Impressive Growth and Market Penetration

In Q2 2023, Toast exhibited a commendable performance, consistently shining across all key performance indicators. The company achieved an impressive year-over-year revenue growth of 45%, amassing a total of $978 million. This success is further emphasized by the remarkable addition of over 7,500 new locations, bringing the company's total footprint to approximately 93,000 locations by the end of the quarter. The strides made in this period reaffirm that not only is there a vast reservoir of untapped opportunities for Toast, but the company's business model is inherently potent. This model hinges on delivering unmatched utility to its restaurant clientele.

Illustratively, consider a small-town diner that joined the Toast platform this quarter. By leveraging Toast's suite of tools, the diner optimized its operations, enjoyed seamless digital payments, and even launched an online ordering system for local deliveries. Such practical utility shows why Toast's offering is invaluable to establishments of all sizes. Even with its broad customer base, the scope for expansion remains considerable. The U.S. boasts nearly 800,000 restaurants. A staggering 70% of these are single-location entities, and 90% operate with fewer than 50 staff members. This data paints a picture of a highly fragmented industry. For Toast, this fragmentation signifies an expansive realm of possibilities. The potential for growth is vast, provided the company continues to wield a sales and marketing strategy that effectively attracts and retains new customers.

Localized Marketing and Bridging Technology Gaps

The momentum driving Toast's growth can be significantly attributed to its localized go-to-market strategy, with particular emphasis on the Small and Medium Business (SMB) segment, which is pivotal to their expansion. Instead of adopting a passive stance and waiting for restaurants to approach them, Toast is proactively diving into local territories with in-person marketing. This hands-on approach is a key factor behind their increasing market share over legacy vendors. By directly stepping into neighborhoods and initiating grassroots marketing efforts, Toast effectively addresses the needs of small businesses. Such establishments, often inundated with the day-to-day challenges of operations, find a partner in Toast, which understands their unique challenges. The company's strategy offers these businesses a personal touch and attention level that they've previously been deprived of.

Moreover, the restaurant sector stands out as one of the few remaining industries yet to fully harness the benefits of technological innovations, with many operations still entrenched in traditional methodologies. Toast is effectively bridging this gap, ushering these businesses into the modern age by introducing state-of-the-art solutions tailored to their needs. In doing so, Toast isn't just providing a product; they're shaping the future trajectory of the restaurant industry.

Toast's extended market presence, combined with the expansion of the accounting executive team, has culminated in a surge of inbound traffic, enhanced success rates in acquisitions, and a spike in representative productivity. This is not merely a coincidence; it is a testament to the company's strategic direct marketing approach.

Fundamentally, this strategy is akin to sowing seeds and patiently waiting for them to bear fruit. Concrete data from the business underscores that having a palpable presence in the market is a primary catalyst for attracting new clientele. In the tight-knit world of restaurant ownership, word-of-mouth remains a potent force. Conversations among owners have been abuzz with how Toast offers unparalleled value to operations, and this, importantly, comes without an exorbitant price tag. In fact, while legacy vendors might levy similar payment processing fees as Toast, they lag behind in providing the specialized software solutions that Toast brings to the table. The underlying message is clear: not only is Toast competitive in terms of pricing, but it also excels in delivering unique, tailored solutions that resonate with the specific needs of restaurant owners.

Innovative Product Launches and Strategic Partnerships

Toast has recently launched a series of innovative offerings such as "Toast for Hotel Restaurants," "Toast Tables," and the "Catering & Events" product, each targeting diverse facets of the Total Addressable Market (TAM). This strategic move is an exemplification of a classic SaaS strategy: to expand market share by enhancing core technology to meet distinct use cases. Such a targeted approach starkly contrasts with Toast's competition, who tend to adopt a more generalized strategy, a pitfall that has been the Achilles heel for many legacy enterprise software providers.

Toast for Hotel Restaurants aims to redefine hotel dining experiences by merging dining expenses directly with hotel room billing. This means guests can effortlessly charge their meals and drinks to their rooms, ensuring a cohesive payment process across various hotel dining avenues. Furthermore, by integrating seamlessly with hotel property management systems, it simplifies operations, augments revenue streams, and enables the direct processing of room charges straight from the point of sale.

Toast Tables offers a holistic solution to table management, tackling reservations, and waitlists in an integrated manner. With this platform, restaurants gain access to live table updates, server rotations, and cover counts, all working in tandem to boost turn times and elevate server efficiency. It also revolutionizes the diner's experience by facilitating online reservations and waitlist features. Moreover, with real-time, automated table status updates from the POS, establishments can predict table availability and expedite table turnovers.

Toast Catering & Events addresses the complex challenges of handling sizable catering orders and orchestrating events. Providing a comprehensive solution, it boasts features like tailor-made banquet event orders, streamlined fulfillment tools, and advanced lead management functionalities. Caterers and event organizers can benefit from its support in digital invoicing, processing high-volume orders, and meticulous project management. Additionally, tools to generate digital contracts, quotes, and estimates are seamlessly integrated into the Toast POS system.

In a significant stride toward reaching varied segments of the restaurant industry, Toast recently unveiled a pivotal partnership with Marriott Select Service Hotels. This alliance underscores Toast's vision and capability to further embed itself into a wide spectrum of restaurant and enterprise arenas. The "Toast for Hotel Restaurants" technology, a specialized offering, is now accessible to the food and beverage outlets operating within Marriott's Select service hotels in both the United States and Canada. Tailored specifically to cater to the nuanced demands of hotel restaurant operations, this innovation boasts powerful integrations with top-tier hotel property management systems (PMS). The goal is clear: to utilize advanced technology to elevate the hospitality experience, offering integrated food and beverage functions and ensuring a seamless experience for both hotel personnel and guests.

Yet, the significance of this partnership extends beyond mere immediate fiscal gains. It underscores a pivotal insight: Toast's solutions possess a versatility that transcends the boundaries of conventional restaurants. Imagine a guest at a Marriott Select Service Hotel in Toronto ordering a meal via an app, enjoying the seamless integration of billing with their room charge, and leaving a glowing review about the hassle-free experience. Such scenarios, made possible by Toast's technology, highlight its applicability in non-traditional restaurant settings. This development not only fortifies Toast's position in the market but also promises to serve as a compelling case study, positioning the company to secure more partnerships with establishments that deviate from traditional restaurant models.

Thesis II: Monetization still has Significant Potential from Spending and Subscription Growth

Thesis Summary

Revenue Growth and Service Expansion:
- Toast achieved a 45% year-over-year revenue growth, reaching $978 million, largely propelled by its subscription services and payments. While growth in subscription services was less pronounced due to the law of large numbers, the payments segment remained the dominant revenue source, signifying Toast's successful integration of software solutions with its core payment services.
Market Penetration and Customer Adoption:
- Toast experienced a notable surge in Gross Payment Volume (GPV) due to expanding restaurant clientele, highlighting vast market potential. Despite a stabilization in spend per location, the increase in both subscription revenue per location and payments per location outpaced GPV growth, demonstrating efficient monetization of GPV and a higher take rate in payments.
Focus on SMB and Mid-Market Segments:
- In the SMB sector, businesses like Tempo Urban Bistro are extensively utilizing Toast's platform. In the mid-market segment, partnerships with entities like Ninety Nine Restaurant & Pub emphasize Toast's scalability and ability to streamline operations across multiple outlets.
International Expansion and Customer Feedback:
- Toast's expansion into international markets like Canada, Ireland, and the UK has been met with positive customer feedback. Key partnerships, like with Arcade in the UK, showcase Toast's adaptability and effectiveness in diverse market environments.
Product Innovation and Strategic Growth:
- Toast's innovative product launches and strategic partnerships continue to drive its expansion across various restaurant segments. The company's ability to surpass the $1 billion threshold in Annual Recurring Revenue (ARR) marks a significant milestone, indicating stability and potential for sustained growth.
Adaptation to Industry Fragmentation:
- Toast's growth is bolstered by the fragmented nature of the restaurant industry, offering opportunities for continued expansion. The company's direct marketing approach and understanding of industry-specific challenges enable it to effectively attract and retain new customers.
Revenue Distribution and Business Model Evolution:
- The distribution of revenue sources, with a slight increase in subscription services and a steady contribution from payments, reflects Toast's evolving business model. The company's focus on recurring revenue streams and expansion across different restaurant segments positions it for long-term growth and market dominance.

Substantial Growth and Expansion Efforts

Toast's revenue growth in the recent quarter was largely propelled by its subscription services and payments, reflecting current industry trends. Interestingly, while the growth surge from subscription services wasn't as pronounced as in previous periods, this can be attributed to the law of large numbers. Given Toast's considerable success in recent times, the company is contending with steep base effects, making such incremental growth more challenging to achieve.

In terms of revenue distribution, subscription services now account for 12% of the total revenue. This represents a slight increase from Q2 2022. Conversely, payments remain the dominant revenue source, constituting 83% of the total, consistent with the figures from Q2 2022. Assessing these metrics collectively, it becomes evident that Toast's growth trajectory is deeply rooted in its core product, primarily payments. Simultaneously, the company is achieving supplementary growth from its software offerings, suggesting a well-rounded and diversified growth strategy.

Expanding Market Reach and Customer Adoption

The recent quarter witnessed a notable surge in the Gross Payment Volume (GPV) for Toast. This increase can be attributed to the company's successful expansion of its restaurant clientele, further underscoring that there exists a vast growth potential. One of the significant factors contributing to this potential is the inherent fragmentation of the restaurant industry. Unlike sectors dominated by a handful of giant corporations, the restaurant landscape is dispersed, with numerous individual and small-scale operators. This dispersion offers Toast an expansive opportunity to acquire new business partnerships.

On the flip side, a noteworthy observation was the stabilization of the spend per location, showing no significant spikes. This trend can be explained by a mix of factors. Firstly, after several years of growth surpassing typical patterns, there appears to be a moderation in overall restaurant spending in the country. Secondly, the time it takes for new locations to match the performance levels of existing, more established restaurants is likely a contributing factor. It's common for many new clientele to adopt a phased approach when integrating Toast's platform. Initially, they might implement it in a subset of their locations, testing the waters and gauging the platform's efficacy. As they become more familiar and confident with the system, they tend to expand its application to other branches. This gradual rollout can temper immediate spending surges but sets a foundation for more sustained, long-term growth.

In a notable observation, both the subscription revenue per location and payments per location witnessed an increase surpassing that of the Gross Payment Volume (GPV). This showcases Toast's commendable ability to efficiently monetize the GPV. Delving deeper into the subscription component, the rise can be attributed to restaurants broadening the range of applications they subscribe to. A testament to this trend is the impressive statistic that the number of locations utilizing 6 or more elective products experienced a whopping 69% growth.

On the flip side, when examining the payments arena, the discrepancy between the growth rates of payment revenue and GPV can be traced back to a higher take rate. Essentially, Toast has managed to extract a greater portion of revenue from each transaction, thus optimizing their earnings from the payment segment. These insights reflect Toast's adeptness in both expanding its product offerings and ensuring that every transaction is a profitable one.

Analyzing the business's current position, there's a prominent uptick in the recurring revenue rate, registering a remarkable 45% increase. This surge underscores the evolving nature of the business model, where a growing proportion of the revenue is now rooted in recurring avenues. Furthermore, this quarter marked a monumental achievement for the company as it surpassed the $1 billion threshold in Annual Recurring Revenue (ARR). Crossing this benchmark is a significant accomplishment for any Software as a Service (SaaS) entity, signifying both stability and sustained growth potential for the future.

Strategic Growth in Various Segments and International Expansion

In the Small and Medium Business (SMB) sector, a shining example of Toast's versatility is Tempo Urban Bistro. Situated just outside Phoenix, this full-service restaurant plans to harness the full potential of Toast's platform, integrating nine distinct modules that span all product pillars. This encompasses everything from the use of Toast Go handheld devices in dining areas, Kitchen Display Systems to refine kitchen processes, Toast Tables for reservations, to Mobile Order and Pay solutions aimed at enhancing front-of-house operations. Furthermore, they are keen on utilizing Toast's loyalty programs, gift cards, and email marketing tools to transform occasional visitors into loyal patrons. Not to be forgotten, the back-of-house isn't left behind, with Tempo adopting Toast Payroll and xtraCHEF to refine operations. With aspirations to inaugurate three to four more outlets, Tempo is eagerly anticipating its growth journey in tandem with Toast.

Shifting the lens to the mid-market segment, the Ninety Nine Restaurant & Pub, collaborating with Restaurant Growth Services, is gearing up to incorporate Toast across its impressive 90+ establishments located in the Northeast. Catering to an astounding 20 million customers annually, the Ninety Nine found itself gravitating towards Toast. The motivation? A chance to overhaul and optimize both their front and back-of-house processes with Toast's comprehensive platform. Their grand vision incorporates the use of Toast Go handhelds, Kitchen Display Systems, and POS terminals, all geared towards elevating the experiences of both customers and staff. On the operational side, the back-office brigade plans to exploit API integrations and the multi-location management module, ensuring a seamless process for updating menus and obtaining a transparent overview of their operations.

Turning our attention to the international arena, Toast's endeavors in Canada, Ireland, and the UK have been met with overwhelmingly positive feedback. Customers are enamored with the fundamental features that simplify restaurant functions. Toast's R&D division is diligently collating customer insights to enhance the platform's capabilities further.

A testament to Toast's global acclaim is the collaboration with Arcade in the UK. Following a triumphant rollout of Toast at its Centre Point venue in London, Arcade is now set to incorporate Toast at its forthcoming Battersea establishment and a duo of food trucks. The Battersea branch, boasting 13 diverse cuisines nestled under the iconic power station's roof, intends to replicate Centre Point's model. The strategy involves assimilating the Toast platform throughout the food hall's operations, along with adopting the kitchen display system across all its culinary sections.

Thesis III: Massive and Expanding Restaurant Technology TAM

Thesis Summary

Shift from Legacy to Cloud-Based Systems:
- The restaurant industry is experiencing a significant shift from traditional legacy systems to cloud-based platforms, driven by a need for flexibility, integration, and customer engagement. Cloud-based solutions offer scalability, data accessibility, and seamless integration of various functions, contrasting the limitations of legacy systems.
Growth and Technological Renaissance:
- The US restaurant industry is projected to see a 10% increase in sales, reaching $997 billion in 2023, reflecting economic recovery and growth post-pandemic. However, the industry still allocates only 1.97% of gross revenue to technology, indicating substantial potential for increased technology adoption.
Technology Investment Priorities:
- Strategic investments cover POS software, payment processing systems, guest interaction tools, and back-office solutions, essential for streamlining operations and enhancing customer interaction. The growing online food delivery market also necessitates agility and technological adeptness.
Future Focus on Technology:
- Technological innovation is key to future profitability and market differentiation. Advanced technologies in order taking, customer upselling, and inventory management will become distinguishing factors for successful restaurant operators in 2024 and beyond.
Restaurant Sales Surge and Tech Adoption:
- The significant increase in restaurant sales has led to escalating trends in technology spending. Restaurants are investing in upgraded systems to handle growth in customer transactions and to improve operational efficiency and customer experience.
Driving Forces Behind Tech Spending:
- Factors influencing technology expenditure include job growth in the sector, rising labor costs, increased disposable income among consumers, and moderating inflation. These drivers encourage restaurants to invest in technologies that optimize labor efficiency, enhance customer experience, and provide robust data analytics.
Payment Processing as a Beneficiary:
- Many restaurant technology providers also serve as payment processors, benefiting from both the transaction volume and the push for restaurants to adopt more sophisticated payment technologies. This dual role accelerates technology adoption in the industry.

Restaurant Technology Ecosystem

The restaurant technology industry is in the midst of a tectonic shift, a change characterized by an exodus from the traditional, often siloed legacy systems to the more fluid and expansive cloud-based platforms. At the heart of this shift is a strategic reevaluation by restaurants of their technology infrastructure, predicated on a new set of operational imperatives that prioritize flexibility, integration, and customer engagement.

Dynamics: Legacy vs. Cloud-Based
Legacy players, once the bedrock of restaurant operations with their robust but inflexible systems, are ceding ground to innovative cloud-based solutions. These traditional systems, often on-premise, are being outpaced due to their limitations in scalability, data accessibility, and integration capabilities.

Cloud-based solutions, on the other hand, offer a contrasting design philosophy. They are built on the foundations of connectivity and real-time data flow, enabling restaurants to have a unified view of their operations across all locations and platforms. This connectivity extends beyond the restaurant to encompass the broader supply chain, delivering a level of transparency and control that legacy systems struggle to match.

The Design of Cloud-Based Solutions
Cloud-based restaurant technology platforms are designed with a modular approach, allowing for seamless integration of various functions such as POS, inventory management, online ordering, and customer relationship management into a cohesive ecosystem. This not only eliminates the need for multiple disparate systems but also streamlines the data analysis process, providing restaurant operators with actionable insights.

Moreover, these modern platforms are inherently more adaptable, enabling rapid deployment of new features and updates without the need for significant downtime or overhaul, a stark contrast to the manual updates and maintenance required by legacy systems.

Reasons for the Switch
The reasons restaurants are transitioning to cloud-based solutions are multifold:

Operational Efficiency: Real-time data and integrated systems allow for a more efficient operation, reducing manual entry and potential errors.

Cost-Effectiveness: Cloud-based solutions often operate on a subscription model, reducing the need for large upfront investments and making advanced technology accessible even to smaller operators.

Scalability: As restaurants expand, cloud-based systems can easily grow with the business, a stark contrast to the scale limitations of legacy systems.

Customer Expectations: Modern diners demand seamless digital interactions, from online reservations to mobile payments, which are more effectively delivered through cloud-based technologies.

Data Utilization: The use of big data and analytics is becoming increasingly critical for competitive advantage, and cloud-based solutions are inherently better equipped to handle large volumes of data.

Remote Management: Cloud-based systems allow for remote management of restaurant operations, providing owners and managers with the flexibility to oversee their business from anywhere.

Vendor Consolidation: Restaurants are looking to streamline their technology stack, preferring to deal with fewer vendors that can provide an all-in-one solution rather than juggling multiple relationships and integrations.

These drivers underscore the appetite for a more dynamic, connected, and intelligent set of tools within the restaurant industry. As restaurants recognize the potential of cloud-based solutions to transform their operations and customer experience, legacy systems are increasingly viewed as relics of a bygone era—an era that no longer aligns with the pace and innovation of today's food service landscape.

Technological Renaissance in the Restaurant Industry and Future Growth Potential

The current conditions in the restaurant industry suggest a burgeoning recognition of the strategic importance of technology investments, with the sector on the cusp of a technological renaissance. The projected $997 billion in sales for the US restaurant industry in 2023, a 10% increase from the previous year, is a potent indicator of the industry's vitality and its ability to rebound and grow post-pandemic. This economic momentum is parallel to the anticipated increase in technology spending, set to reach $15 billion in 2023, up from $12 billion. This uptick reflects a sector poised to embrace digital transformation more robustly.

Despite this optimistic uptrend in technology expenditure, the restaurant industry still allocates a modest 1.97% of its gross annual revenue to technology. This figure pales in comparison to the average US business, which dedicates nearly 7% of its revenue to technological investments. This discrepancy points to a significant growth potential within the restaurant sector for increased technology adoption and integration.

The strategic allocation of this investment covers a spectrum of technological tools designed to streamline operations and enhance customer interaction. POS software and payment processing systems stand as foundational investments, critical for the day-to-day running of restaurant operations. Guest interaction tools and feedback systems are equally vital, offering a direct line to customer preferences and experiences, while back-office solutions like accounting and payroll systems are essential for operational integrity and efficiency.

The broader market dynamics, especially the burgeoning global online food delivery market, forecasted to grow at a CAGR of 10.8% from 2022 to 2028, underscore the necessity for the restaurant industry to remain agile and technologically adept. This growth trajectory aligns with consumer trends favoring convenience, digitization, and personalized service.

As we project into 2024, it becomes clear that technological innovation is more than a trend; it is a critical driver for future profitability and market differentiation. The ability to introduce efficiencies in order taking, enhance customer upselling opportunities, and refine inventory management through advanced technologies will likely become distinguishing factors for successful restaurant operators. Those who can effectively integrate these advancements and align them with the evolving consumer landscape will position themselves to capture growth and solidify their market presence.

Restaurant Sector's Growth and Tech Adoption: Driving Forces and Financial Trends

The sustained surge in restaurant sales, as reported by the Federal Reserve, with a 16% increase in the first quarter of 2023 and a 9% rise in the second, following robust growth of 30% and 14% in 2021 and 2022 respectively, indicates a strong post-pandemic recovery and a sector experiencing significant demand. This vigorous financial performance has a direct correlation with the escalating trends in restaurant technology spending.

Payment Processing as a Dual Beneficiary
Many players within the restaurant technology ecosystem also serve as payment processors, positioning them uniquely as dual beneficiaries of this growth. The increased volume of transactions from higher sales not only boosts their revenue through processing fees but also provides a compelling case for restaurants to adopt more sophisticated payment technologies to handle the growth in customer transactions. Thus, payment processors not only gain from their role in facilitating transactions but also from the impetus this gives to restaurants to invest in upgraded systems.

Increased Sales and Technological Imperative
The uptick in restaurant sales has a cascading effect on the technology spending behaviors within the industry. With more revenue, restaurants have greater spending power, which they can allocate towards technological upgrades. This is not merely a by-product of increased funds but a strategic imperative. To sustain and further drive growth, restaurants must invest in technologies that streamline operations, enhance the customer experience, and provide robust data analytics for strategic decision-making.

Key Drivers of Restaurant Spending

Job Growth: The over 2% annual job growth within the restaurant sector from an already high base signifies more workers being absorbed into the industry. This is not just a sign of a growing sector but also heightens the need for management systems to handle scheduling, payroll, and training, directly influencing technology spending.

Wage Growth: The over 4% annual increase in wages from a high base indicates rising labor costs. Restaurants, therefore, have a keen interest in technology that can optimize labor efficiency, such as automated ordering systems or AI-driven upselling tools, to offset these increased costs.

Disposable Income Growth: Over 3% growth in disposable income from a very high base suggests consumers have more to spend on dining out. Restaurants must capitalize on this by enhancing customer experience through CRM systems, loyalty programs, and personalized marketing, which in turn drives technology expenditure.

Moderating Inflation: As inflation begins to moderate, the relative cost of technology investment decreases, making it a more attractive proposition for restaurants. This could lead to an acceleration in technology spending as the real cost of investment declines.

Forecast and Valuation

Toast's market potential in restaurant technology is significantly understated by current stock valuations. The platform's 45% year-over-year revenue growth to $978 million and expansion to 93,000 locations underline Toast's successful penetration into the fragmented restaurant market. Innovations like specialized products for hotel restaurants and a strategic partnership with Marriott demonstrate Toast's adaptability and expansion capability. Furthermore, the company's localized marketing strategies, focusing on SMBs, signal a deep understanding of the industry's unique demands.

Despite these promising dynamics, the stock has not fully captured Toast's growth trajectory. The ongoing shift from legacy to cloud-based systems in the restaurant industry, coupled with Toast's innovative product offerings and strategic market expansions, suggests an untapped growth potential that is yet to be fully realized in its market valuation.