Restaurant management platform Toast Inc. (NYSE: TOST) is scheduled to announce its third quarter 2022 financial results after the market closes on Thursday, November 10. Investors are eager to see if the company can continue its strong growth trajectory amidst a challenging macroeconomic environment.

Toast provides an all-in-one platform for restaurants to manage online ordering, payroll, accounting, analytics, and more. The Boston-based company went public in September 2021 and has rapidly grown its customer base to over 65,000 restaurant locations. However, Toast faces stiff competition from POS systems like Square and Clover.

In the second quarter of 2022, Toast impressed investors by beating revenue expectations and raising full-year guidance. Total revenue grew 58% year-over-year to $675 million, surpassing analysts’ consensus estimate of $663 million. The company added over 5,000 net new restaurant locations in Q2, bringing its total restaurant count to over 68,000. Toast also posted a strong guidance for Q3, projecting revenue of $700–730 million versus the $719 million expected by Wall Street.

For the third quarter, the consensus among 13 analysts polled by Yahoo Finance expects Toast to report revenue of $720 million, representing growth of 37% from Q3 2021. Earnings per share are projected at $0.01, compared to a loss per share of $0.34 in the prior year quarter.

Factors to Watch in Toast’s Q3 Results

While Toast has impressed in recent quarters, investors will be monitoring a few key factors in the upcoming Q3 report.

Revenue Growth and Guidance

In Q2, Toast saw 58% revenue growth year-over-year. But that is expected to moderate to 37% growth in Q3. Investors will want to see if Toast can beat projections and maintain strong momentum despite macro headwinds. The company’s guidance for Q4 revenue and profitability will also be in focus.

Operating Margins

Toast is spending heavily to grow its platform and customer base. In Q2, sales and marketing costs equaled 35% of revenue. R&D spend hit 20% of revenue. As a result, Toast posted an operating loss of $68 million. Investors will look for signs that Toast can scale efficiently and expand operating margins over time.

Customer Growth and Retention

Toast added over 5,000 net new restaurants on its platform in Q2, and stated that customer churn remained below pre-pandemic levels. Growing Toast’s customer base and keeping them on the platform long-term is critical to justifying the company’s steep valuation. Management’s commentary around new customer wins and retention metrics will be closely analyzed.

Macroeconomic Pressures

The restaurant industry is facing inflationary pressures, higher food costs, and a tight labor market. These issues could impact Toast’s ability to grow and retain customers. Investors will listen for how management assesses the current operating environment and whether Toast is seeing any changes in restaurant spending patterns so far in Q4.

Stock Reaction to Prior Earnings Reports

Toast’s stock rose 10% after Q1 results in May, when the company beat on both the top and bottom lines. After Q2, shares initially jumped 10% but gave back most gains the next day after analysts pointed to margin pressures. Toast has beat earnings expectations both quarters as a public company — extending that streak could boost the stock.

Competitive Landscape

Toast occupies a competitive space with point-of-sale systems from Square, Clover, and others. Updates on how Toast is differentiating its offering and gaining market share against rivals will be important indicators for the long-term investment thesis.

Valuation

Toast currently trades around 10x expected 2022 revenue. While the valuation has come down since its peak post-IPO, some analysts still view the stock as overvalued given increasing profits remains several years off. Upside surprises on revenue or margins could improve Toast’s risk/reward profile.

What Wall Street is Saying Ahead of Earnings

Analysts are cautiously optimistic about Toast heading into the print. Since Q2 results, multiple analysts have maintained buy ratings on the stock while trimming their price targets.

Morgan Stanley recently reiterated an Overweight rating but lowered their PT from $27 to $24. They see Toast well-positioned to capture share in a $200 billion market, though margin pressures may persist in the near-term.

Keybanc analysts also rate Toast Overweight with a price target of $25. They view Toast as a long-term winner in the restaurant tech space and believe current headwinds are temporary.

On the other hand, UBS lowered their rating on Toast to Neutral from Buy in late October. While they believe in Toast’s product, they have concerns about further deceleration in revenue growth and cash burn. UBS trimmed their PT from $22 to $16.

Market Reaction on Earnings Day

Toast’s stock has been under pressure in 2022 amid the growth stock sell-off, declining 61% year-to-date. However, shares have rebounded nearly 20% over the past month heading into earnings.

With Toast exceeding expectations in recent quarters, investors appear optimistic the company can deliver another beat. A strong report could provide a further catalyst to push the stock higher.

However, if Toast delivers disappointing growth metrics or disappointing guidance, shares could resume their downward trajectory. Toast has a high bar to clear to satisfy growth-oriented investors.

Given the positive momentum in recent weeks, Toast likely needs to blow away expectations to drive significant upside. In-line results may not be enough to boost shares further near-term. An earnings miss could lead to an outsized sell-off.

Toast is a compelling long-term investment, but still has plenty to prove on its path to profitability. Thursday’s report will provide critical insight into how Toast is navigating an uncertain macro environment. Investors should brace for volatility surrounding the event.

Bottom Line

Toast’s third quarter earnings will give investors the latest read on the health of the restaurant industry and the company’s growth prospects. Expect management to field tough questions around customer retention, competitive threats, margin pressures, and cash burn on the earnings call.

While macro conditions present some hurdles in the near-term, Toast remains well-positioned to capitalize on the digital transformation in the restaurant industry. But execution risks exist, and profits remain elusive. Traders should approach the stock cautiously into the print, while long-term investors can watch for buying opportunities on any unjustified weakness.