Morgan Stanley’s Highest Conviction Stocks: Top 20 Stocks To Buy

10. Toast, Inc. (NYSE:TOST)

Share Price Upside: 21%

Number of Hedge Fund Investors In Q2 2024: 43

Toast, Inc. (NYSE:TOST) is a specialty payments company that caters to the needs of the hospitality industry. It is one of the few companies of its kind that offers payment solutions directly to the restaurant industry, which provides Toast, Inc. (NYSE:TOST) a wide competitive moat within its industry. By becoming highly specialized in its domain, the firm could build a considerable number of partnerships in the industry which make it the brand of choice for US restaurants. Estimates show that as of 2023 end, there were 749,404 restaurants in America, and as of Q2 2024, Toast, Inc. (NYSE:TOST) had 120,000 locations in its portfolio. Not only does this create a significant untapped TAM for the firm, but it also means that net restaurant additions per quarter are a key Toast, Inc. (NYSE:TOST) performance metric that’s based on its hypothesis. The firm can also benefit from expanding into other industries, such as groceries, which is key to allowing Toast, Inc. (NYSE:TOST) to overcome its biggest weakness which is the cyclical exposure of its business model.

Toast, Inc. (NYSE:TOST)’s management commented on its diversification plans during the Q2 2024 earnings call:

“We recently expanded our partnership with mussels pretzels by signing an extension for another 100 stores in addition to the 300 locations already on our platform. We continue to roll our Toast across a number of marquee brands, including wet soils and barbecue holdings, which are part of fast-growing MTY brands. And the improvements we have made to our platform, combined with our strong pipeline gives us confidence in steadily increasing enterprise penetration over time. As I mentioned in our Investor Day in May, the work we’ve put in over the past decade building on our platform has allowed us to enter new verticals, including grocery, convenience stores and bottle shops. There are 220,000 locations and 660 billion in spend in these markets alone in the U.S. And so far, we’ve booked 1,000 new customers.

We see a significant growth opportunity here, in part because so much of this market is still using legacy on-prem solutions and see the benefits of an integrated cloud platform. For example, Victory Hospitality Group in Portland, Maine, recently launched three markets on Toast in addition to their portfolio of award-winning restaurants that have been with us since 2016. Since adding Toast, the staff has been able to offer better service to their guests by making back-office tasks, including inventory management, much more streamlined. We see examples like this across many of our early retail customers and have confidence that we can drive significant growth in the segment.”