Market Overview
The market surged higher yet again last week, and traders are beginning to wonder if a run at new highs is in the cards in 2023. While there is a way to go until we reach those peaks, last week’s gains of 2.4% for the S&P 500, 2.3% for the Dow, and 3.32% for the Nasdaq gives the bulls hope.
Of note, this week is the expiration of our July covered call trades. I will update you where we stand with these positions Thursday afternoon or Friday morning.
The Stock – Toast (TOST)
Why the Strength
Toast is one of two new-age payment firms (Shift4 is the other) that we’ve been watching for a while—Toast has been a laggard but is now picking up steam as the underlying story remains powerful.
Toast is solely targeting the gigantic restaurant industry, with an all-in-one platform (also includes scheduling, marketing/loyalty programs, reservations, takeout/delivery, back office support, inventory and more, along with payments and even some lending) for one of the largest sectors in the U.S. and around the world (860,000 restaurant locations in the U.S. alone)—there’s obviously competition (including from Shift4), but Toast thinks it has a $55 billion opportunity in the U.S alone (!), so there’s tons of whitespace to replace legacy, on-premise solutions. (Impressively, 20%-ish of new clients for Toast come through partner referrals.)
There are a few types of revenue here, but the main driver is and will be recurring subscription and payment revenue—at the end of March, annualized recurring revenue (ARR) was $987 million, up 55% from a year ago, driven in part by a 37% leap in locations (to 85,000); that growth should slow as Toast gets to be a good-sized firm, but this year as a whole should see 40% ARR growth, if not more. The bottom line is in the red, but EBITDA is approaching breakeven and the firm is clearly in the land-grab phase with just 10% of potential locations under its belt (and that says nothing of the international opportunity). Indeed, a June deal with Marriott to have its platform available for all in-hotel food and beverage outlets speaks to the potential here; a few deals like that could change the financials in a hurry (and goose investor perception). Earnings are due August 10.
Technical Analysis
After months of bottoming, TOST tried to get going earlier this year, but February’s earnings report ruined that, leading to a huge gap down. The recovery after that was slow, but gained steam into June, with a few weeks of tightness preceding last week’s good-volume rally. Stop - 22
The Covered Call Trade
Buy Toast (TOST) Stock at 26, Sell to Open August 24 Strike Calls (exp. 8/18) for $2.75, or a Net Price of 23.25 or less
Static Return: $75 per covered call (3.22%)
Breakeven: 23.25
Covered Call Return (if assigned): $75 per covered call (3.22%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 23.25 or less. (In this case 26 minus 2.75 = 23.25. Or another example is you could pay 26.10 for the stock and sell the call for 2.85, which also equals 23.25)
For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
The next Cabot Profit Booster issue will be published on July 25, 2023.
