Toast Earnings: Strong Unit Onboards Propel Solid Performance Despite Challenging Backdrop

Narrow-moat Toast's second quarter was solid, with the firm's $1.24 billion in revenue matching our projection, while $92 million in adjusted EBITDA comfortably edged our $74 million forecast as the firm posted GAAP profitability for the first time. Strong 27% revenue growth was driven by a robust 8,000 restaurant additions and modest increases in software sales per unit (up 5.3%), an attestation to the allure of the firm's attractive product suite despite a very challenging industry environment. As we digest quarterly results, we envision limited changes to our $23.50 fair value estimate, with strong growth prospects and an expected near-term uptick in investment largely offsetting—with the latter likely responsible for a mid-single-digit-percentage selloff in aftermarket trading. We view the market reaction as myopic, given the strong incremental returns on capital that Toast continues to enjoy, leaving shares trading in a range we'd consider fairly valued.