We recently compiled a list of the 14 Best New Tech Stocks To Buy Now. In this article, we are going to take a look at where Toast Inc. (NYSE:TOST) stands against the best new tech stocks to buy.
Tech Stocks Should Not Be Divested From
Tech stocks have long gained the attention of investors, with tech giants helping the S&P 500 climb a staggering 400% from 2009 to 2022. The Nasdaq 100 index did even better, surging over 700% in the same period.
However, the first half of 2022 saw a brutal market correction, the worst in 50 years for Wall Street. Geopolitical tensions, skyrocketing energy prices, and rising interest rates all played a part. Tech stocks took a heavy hit, with large tech companies dropping as high as 39% at one point.
Tech stocks are risky investments. When money was cheap during the pandemic, people borrowed a lot and invested in tech and crypto. This made the prices go up very high, overvaluing the tech sector. But when central banks raised interest rates, people started selling tech, which made the prices go down.
Earlier this week, we posted an article 10 Best Emerging Tech Stocks to Buy Now, where Mad Money host and former hedge fund manager Jim Cramer said that tech stocks should not be divested from. Here’s an excerpt from that article:
“He (Cramer) believes that major technology firms, which are integral to ongoing robust trends like data centers and accelerated computing, should be viewed as attractive buying opportunities when the market weakens, instead of the opposite sentiment…. September is historically the weakest month for the market, with consistent profit-taking. But, he sees this as a circular argument rather than a sign of an economic downturn. He believes the broader selling pressure in September is due to tech stocks meeting but not exceeding expectations.”
This is especially important to absorb as we see more and more analysts move away from the anticipation of a recession. Anastasia Amoroso, iCapital chief investment strategist, says that despite signs of a weakening labor market, such as rising unemployment and increased layoffs, she does not foresee an imminent recession. The market is expecting a 25-basis point rate cut from the Fed, possibly a larger 50-basis point cut if economic indicators worsen.
The economy is still growing at a rate of 2%, although it’s slower than before. Amoroso noted that key economic indicators do not suggest a high probability of a recession. While the market is cautious, there is potential for a positive outlook. Rate cuts and a slowing economy could lead to a more favorable market environment.
IPO Outlook
EY Global IPO Trends Q2 2024 reported that in the first half of 2024, global IPO activity experienced a downturn, with volumes declining by 12% (551 listings raising a total of $52.2 billion in capital) and proceeds declining by 16% compared to the previous year.
For the first time in 16 years, the EMEIA region reclaimed the top spot in terms of global IPO market share by number of deals. Industrials emerged as the leading sector in terms of the number of IPOs, while the technology sector raised the most capital through IPOs.
Earlier this year in May, Goldman Sachs Chair and CEO, David Solomon, at a Summit in France, said he is concerned that fewer companies are going public but expects IPO activity to pick up in the second half of 2024.
Solomon provided insights into the recent volatility in equity markets and noted that trillion-dollar companies were experiencing significant swings of up to 10% post-earnings. He acknowledged that such volatility could stimulate business activity, but expressed concerns about the potential narrowing of public markets.
He believes hyper-scalers have grown due to their competitive edge and recent tech advancements. Despite market volatility, he trusts in its efficiency and the importance of public markets for capital allocation and transparency.
Solomon expressed concern over the declining number of public companies due to abundant private market capital and emphasized the need for open, inclusive public markets. While the IPO market has recently revived, he anticipates a gradual increase in activity in the second half of 2024, going into 2025, though less intense than in 2021. However, the trend of companies staying private longer contributes to the overall decline in publicly traded entities.
Recently, CNBC’s Deidre Bosa talked about the significant energy demands of AI and the efforts of tech giants to address this growing need. She highlighted some recent big-tech investments in data centers and nuclear power facilities to back up her claim.
Jensen Huang admitted the related high energy costs but noted AI’s potential to develop energy-saving solutions. Bosa and Huang agree that public-private partnerships are crucial for addressing AI’s energy consumption. While training AI models is energy-intensive, the long-term benefits in areas like healthcare, climate, and grid management outweigh the costs. Both believe AI can revolutionize energy efficiency through innovative solutions.
Amoroso’s insights suggest that the overall economic outlook does not indicate a recession, while Bosa and Huang foresee higher tech investments due to growing AI demand. So with caution and strategic adjustments in investment approaches, potential investment risks can be avoided in the tech sector
Methodology
We used stock screeners to look for companies that went public in the past 3 years. We sorted our screen by IPO date and market cap and looked through the top 30 stocks that went public in the last 3 years and are trading over $1 billion. We then selected 14 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Toast Inc. (NYSE:TOST)
Market Capitalization as of September 13: $14.66 billion
Number of Hedge Fund Holders: 43
Toast Inc. (NYSE:TOST) is a cloud-based restaurant management software company that provides an all-in-one point-of-sale (POS) system built on the Android operating system, helping with inventory management and employee scheduling.
With ~13% market share in US restaurants, the company has a significant opportunity to scale up. It’s also expanding its Total Addressable Market (TAM) into key international markets, enterprise chains, and food and beverage retail. Since launching its digital storefront suite, ~30% of locations have upgraded to the Pro tier, which includes a new website product that enhances their online presence.
In Q2, it achieved a record 8,000 net new locations, resulting in higher productivity and faster market share gains, especially in the top 10 flywheel markets, where the company saw 50% more wins compared to non-flywheel markets.
A notable example is Bizoria, a fast-casual concept in Greater Atlanta, which switched to Toast Inc. (NYSE:TOST) and increased revenue by 25% after integrating the POS terminals with self-ordering kiosks and kitchen display systems.
Overall, this quarter generated a revenue of $1.24 billion, up 26.99% year-over-year. 43 hedge fund holders are long in the company and the highest held stake amounts to $468,347,742 by Durable Capital Partners.
The company focuses on prioritizing enhancing its offerings with products and experiences that resonate with customers. The platform serves all restaurant stakeholders, creating value by supporting new revenue streams and simplifying operations. These factors position the company for growth and make it a top new tech stock to buy now.
Here is what Baron Opportunity Fund has to say about Toast, Inc. in its Q3 2021 investor letter:
“Toast, Inc. is a cloud-based end-to-end technology platform purpose-built for the restaurant industry. Its platform provides a comprehensive suite of cloud software products and financial technology solutions to its customers to connect front-of-house with back-of-house operations across all customer channels. Toast’s core module is its point-of-sale software solution and requires all customers to use Toast as their payment processor. Customers then have the option to bundle or add-on additional modules across operations, digital ordering and delivery, marketing and loyalty, team management, and back office. Toast today powers 48,000 restaurants within the 860,000 U.S. restaurant industry, largely focusing on small- and medium-sized (“SMB”) restaurant customers (generally fewer than 10 locations but up to 50), with some larger enterprise customers as well. Toast is the clear market leader in SMB restaurant technology with the best product offering and only full, end-to-end platform. We believe that as restaurants continue to invest in technology at an accelerated pace emerging from COVID, Toast will be a big beneficiary given its leading market position and best-in-class product. At less than 6% penetration of U.S. restaurants and 3% penetration of its $15 billion recurring-revenue TAM, Toast has a long runway for growth by signing on additional locations to the platform and increasing the attach rate of its value-add modules. Only 54% of customers today use 4 or more of Toast’s 10-plus modules, each of which provide significant value to the customer and would drive Toast’s recurring revenue stream higher.”
Overall TOST ranks 2nd on our list of the best new tech stocks to buy. While we acknowledge the potential of TOST as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than the stocks on our list but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
