Taking a Closer Look at This Bullpen Contender

Two of the things that both American Express (AXP) and Costco (COST) have in common is the power of their respective membership revenue streams and how those streams drive a significant part of their respective pre-tax income.

And while we favor membership business models, we can’t ignore subscription business models and the predictability they bring, as well as the cash flow. Bullpen resident Toast (TOST) has that for its point of sale and cloud-based software as well as ordering and invoice and payroll management solutions. Toast also charges a small fee for acting as a payment facilitator for credit and debit card transactions. That fee is generally calculated as a percentage of the total transaction, which means that as people eat out more, the outlook for that revenue stream improves.

While Toast has another segment that houses its hardware business for its terminal and handheld units, the reality is that even though the Subscription segment and the Financial Technology Solutions (FTS) one account for about 15% and just over 80% of revenue, they drive 40% and 60% of Toast’s profits. If those figures seem a little off, it’s probably because the Subscription business carries gross margins around 78% compared to 23% to $24 for the FTS one. To the extent that Toast is able to bring the Hardware business back into the black, that would be helpful, but given what we’re hearing about memory and related costs, we’re not banking on it near-term.

Here’s the way we see it: As Toast grows the number of restaurant locations on its platform, the higher margin Subscription business rises. The FTS business has two drivers — the first is the additional spending from those added locations and the second is when consumers are more inclined to dine out. That can be seasonal, like we tend to see at this time of year, but also as consumers have, or at least feel like they have, more disposable income.

That second part has us revisiting TOST shares as oil tumbles further, and Tuesday brings the October CPI report. Data from Dow Jones puts the market expectation for headline CPI at 3.7% in October, unchanged with the prior month. October core CPI is also expected to mimic its September year-over-year increase of 2.6%

In preparation for those figures and what they might mean, we are reviewing past multiples for TOST shares. In doing so, we’ve seen that they have tended to peak around at an average P/E that is 160% of that for the S&P 500 and bottom out around 110% of the market multiple. That relative P/E analysis based on the current S&P 500 multiple near 18-times expected 2027 EPS of $423.90, per FactSet data, suggest potential upside to $50 and downside near the current share price and Toast’s 2027 consensus EPS of $1.79. On a PEG ratio basis, TOST shares are trading at 1.0-times 2026 EPS and a price target of $45 equates to a PEG ratio of 1.1-times on 2027 EPS of $1.79.

As we think about that 2027 EPS figure, Toast has delivered a stead step up in its EPS to the $0.37 it reported for Q3 2026. Just annualizing that figure implies an EPS run rate of $1.48, leaving $0.31 to make up to reach that $1.79 figure for next year. Which means, Toast will need to deliver about 20% EPS growth on top of that annualized figure.

Exiting Q3 2026, Toast’s annual recurring revenue reached $2.5 billion, up from $2.0 billion at the end of 2025 as the number of Toast locations reached about 189,000 locations compared to about 164,000 at the end of 2025. Alongside its recent quarterly earnings report, Toast shared that Ruby Tuesday and its roughly 180 locations will come onto Toast’s platform. If were to compare that roughly 189,000 figure against the more than 1 million restaurants and foodservice locations counted by the National Restaurant Association, that would omit the company’s small-but-targeted efforts outside the U.S. and in applications outside of restaurants. Currently, Marriott International (MAR), BWH Hotels, Choice Hotels and Preferred Hotels & Resorts use Toast.

As we think about that, we’re reminded of Micros Systems, a POS company that was swallowed by Oracle (ORCL) back in 2014 that started in restaurants but expanded into hotel, hospitality, sports and entertainment venues as well as specialty retail and other markets. At the time of that acquisition, Micros had 567,000 establishments with more than 370,000 restaurants, 30,000 hotels and 59,000 retail stores spread across 180 countries. The U.S. and Canada were larger markets, while International was growing at a faster clip.

Exiting September, outside North America, Toast operates only in the U.K., Ireland and Australia. Those markets fall within the newer-markets group (international, enterprise and retail) that management said is approaching $200 million in annual recurring revenue on a combined basis. We’ll want to track wins outside the U.S. as well as in retail end markets, including the convenience store market following Toast launching Toast Fuel. That solution targets independent fuel and convenience operators, where an estimated 80% of the fuel bought by consumers in the U.S is sold. Data from the trade association NACS finds there are about 152,000 convenience stores in the U.S., with nearly 123,000 selling fuel. Across the globe, NACS estimates there are more than 1 million convenience stores.

Looking at Toast’s balance sheet exiting the September quarter, it had about $1.9 billion in cash and equivalents on hand and no debt, leaving it with more than $3 per share in net cash. And yes, the company is not only cash flow positive, but free cash flow positive as well. We could see those figures ebb and flow subject to customer wins and deployment, but longer term, Toast should continue to spit off free cash.

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At the time of publication, TheStreet Pro Portfolio was long AXP and COST.