Toast (NYSE: TOST) and Amazon (NASDAQ: AMZN) revolutionized the restaurant and e-commerce industries, respectively, with innovative operational models. Toast offers a comprehensive cloud-based platform for restaurants, providing solutions for guest and kitchen displays, payment processing devices, online orders, reservations, loyalty plans, and payroll management. On the other hand, Amazon has become a global leader in e-commerce, operating first-party and third-party online marketplaces, as well as brick-and-mortar stores through Amazon Go, Fresh banners, and Whole Foods Market subsidiary.
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After its public debut on Sept. 22, 2021, Toast’s stock now trades more than 50% below its IPO price, while Amazon’s stock slipped about 10% during the same period. This begs the question: why did Amazon outperform Toast, and will this trend persist in 2024?
Challenges for Toast
Since its IPO, Toast has significantly expanded its installed locations, reaching about 99,000 by the end of the third quarter of 2023. Despite a rapid recovery from the pandemic-induced slowdown in 2020, its growth trajectory has decelerated, with gross payment volume (GPV) and revenue increasing by 40% and 44%, respectively in the first nine months of 2023. Additionally, Toast remains unprofitable on a GAAP basis due to intense competition and its high dependence on payment processing fees, which are mostly paid back to card networks and processors.
Furthermore, Toast faces headwinds from inflation, prompting many restaurants to curtail spending. Despite making substantial workforce reductions during the pandemic, deeper cuts may be necessary to achieve its goal of positive adjusted EBITDA in 2023. Analysts project a challenging path to profitability, with the company expected to generate a modest adjusted EBITDA profit of $46 million for the full year. Looking ahead to 2024, the company anticipates a 26% rise in revenue, but persistent headwinds and ongoing losses raise concerns about its future stock performance.
Amazon’s Steady Expansion
Amazon’s revenue diversification between e-commerce and Amazon Web Services (AWS) affords a unique advantage, with most of its profits stemming from the latter. Despite challenges in 2022, including inflation impacting online sales and its investment in Rivian backfiring, the company rebounded in 2023. Growth in its advertising business further buoyed margins, and it is expected to post an incremented 11% revenue rise and resume profitability by the end of the year.
Heading into 2024, analysts project an 11% revenue growth and a substantial 34% surge in earnings for Amazon. While it faces formidable competition in the e-commerce market and cloud sector, it is projected to regain its footing, despite being comparatively valued at 40 times forward earnings.
The Preferred Investment: Amazon
While Toast presents growth opportunities, uncertainties loom over its ability to validate its business model and achieve sustained success. Conversely, Amazon boasts a track record of weathering cyclical downturns and appears primed for a resurgence in 2024, making it a more compelling investment compared to Toast.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Block, and Microsoft. The Motley Fool recommends Toast. The Motley Fool has a disclosure policy.