Toast IPO Price Range Increased: Fintech Valuations Rise

Toast IPO Price Range Increased: A Bullish Signal

This morning, U.S. technology company Toast submitted an updated S-1 filing, revealing an increased price range for its initial public offering (IPO). This adjustment suggests a potentially higher valuation for the company upon its market debut than originally anticipated.

The increased valuation is viewed as a positive indicator, not only for Toast itself but also for the technology sector as a whole.

Impact on Software and Fintech Sectors

Toast’s growing valuation could benefit both the software and financial technology (fintech) industries. The company provides restaurants with software as a service (SaaS) on a subscription basis.

Additionally, Toast delivers a range of fintech solutions tailored to the restaurant industry.

Revenue Streams and Valuation

While recognized as a software company with some hardware offerings, Toast derives the majority of its revenue from financial services. Software revenues are prized for their high margins and predictable, recurring nature.

Conversely, Toast’s financial services revenue is primarily transaction-based, resulting in lower gross margins. The IPO pricing could establish a more accurate valuation benchmark for startups combining software and fintech revenue models.

The Rise of Vertical SaaS

The “vertical SaaS” approach – developing software specifically for a single industry – is gaining traction. Many startups are now pursuing a dual revenue strategy, offering both software and fintech services.

Toast’s IPO is therefore considered a potential indicator of market sentiment towards these types of companies.

Key Takeaway

The upward revision of Toast’s IPO price range is noteworthy. It signals strong investor interest and could influence how similar companies are valued in the private markets.

Updated IPO Price Range for Toast

Toast has revised its anticipated IPO pricing, moving from a previous range of $30 to $33 to a new range between $34 and $36.

This adjustment suggests the company now anticipates its IPO price will exceed the prior upper limit, even at the lower end of the updated range. This is a positive signal, demonstrating initial market receptiveness to Toast’s equity offering.

Based on a total share count of 502,593,550 – including the underwriter’s option to purchase shares at the IPO price – Toast’s valuation would fall between $17.1 billion and $18.1 billion.

Considering a fully diluted market capitalization, which incorporates shares from outstanding stock options, the company’s valuation increases. Renaissance Capital previously estimated Toast’s worth at $17.9 billion, using a midpoint price of $31.50 per share. Extrapolating this, Toast could potentially reach a valuation of up to $20.5 billion at a price of $36 per share.

This represents a substantial valuation.

Having addressed the valuation calculations, let’s examine Toast’s revenue distribution from its most recent quarter, ending June 30, 2021:

• Software: $37.6 million.
• Fintech: $353.6 million.
• Hardware: $29.2 million.
• Services: $4.4 million.

It’s important to note that hardware and services generally operate at breakeven, functioning primarily as avenues for sales and marketing. Consequently, these can be considered offsetting costs.

Focusing on software and fintech revenue, it’s evident that Toast’s fintech revenue is approximately ten times greater than its software revenue. This indicates that the company’s recent growth has largely been driven by its fintech operations.

However, these two revenue streams differ significantly in terms of gross margin:

• Q2 2021 software gross margin: 66.2%.
• Q2 2021 fintech gross margin: 20.7%.

Therefore, Toast must generate over $3 in fintech revenue to achieve the same gross margin as $1 in software revenue. This highlights the premium valuation typically assigned to software companies due to their superior revenue generation capabilities.

At a $20.5 billion valuation, Toast is trading at 12.1 times its annualized revenue run rate from Q2 2021, which includes a significant portion of non-software income. The market’s willingness to assign a multiple of 12x to its top line suggests a strong degree of optimism.

This isn’t solely due to a reassessment of the value of lower-margin revenues; Toast’s recent growth has been exceptional, justifying a premium for its above-average top-line expansion.

Even acknowledging this growth, the ability of a company with the majority of its revenue at approximately 20% gross margin to secure a double-digit revenue multiple is remarkable. Sustaining this multiple will require consistently strong growth from Toast.

Key takeaways for startups include:

• A revenue model heavily reliant on fintech with low margins may result in limited, long-term revenue multiples.
• Rapid growth can mitigate many concerns.

Further updates will be provided once the final IPO pricing is determined.