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Toast Inc. TOST shares have plunged 16.8% over the past month, underperforming the Zacks Computer and Technology sector and the S&P500 index’s decline of 11.5% and 7.4%, respectively. The stock has also underperformed industry peers, including Aspen Technology AZPN, Bentley Systems BSY and JFrog FROG.
As one of the leading providers of software-as-a-service (SaaS) and hardware solutions focused on the restaurant market, TOST’s recent decline raises the question: Should investors hold the stock or exit the investment?
One Month Price Return Performance
Image Source: Zacks Investment Research
Why TOST Stock is Declining?
The recent decline in Toast stems from broader market weakness. Investor sentiment has soured amid escalating trade war concerns, with tariffs raising fears of increased costs and dampening consumer purchasing power. President Donald Trump has hiked the tariff rates to 25% on all imported goods from China, Canada and Mexico.
The National Restaurant Association has noted that the 25% tariff hike can cause a 30% profit loss for the average independent restaurant operator, costing the entire restaurant industry up to $12.1 billion. The recent development puts TOST’s business at risk, which is already experiencing customer churn among smaller restaurant customers.
Probable decline in revenues due to customer losses, coupled with rising R&D costs to stay competitive, is expected to pressure margins, leading to investor pessimism about the stock. However, not all is gloom and doom for TOST stock.
TOST Thrives on Location Additions and Repeat Customers
Since macroeconomic pressure and tax scares are forcing small businesses to give up on sophisticated restaurant solutions provided by TOST, the company is now focusing on expanding among enterprise restaurants and food and beverage retail.
Toast is also expanding by targeting new addressable markets, including the convenience store sector, not limiting its reach to the food and beverage sector only. Toast has added features, including Electronic Benefit Transfer and Supplemental Nutrition Assistance Program payments. Toast added 7,000 locations in the fourth quarter of 2024, reaching 134,000 locations in total, reflecting 26% year-over-year growth.
Alongside location additions and international expansion, Toast’s business is also driven by rising annual recurring revenues due to a larger share of repeat customers. Higher adoption of its solutions among customers is mainly due to its suite-based packaging model that simplifies sales and encourages customers to adopt more of the platform over time, boosting average revenue per user.