Toast Inc. (TOST): Overvalued in a Slowing Growth Environment

The restaurant technology sector has long been a growth engine for companies like Toast Inc. (NASDAQ:TOST), which built its business by offering integrated payment and operations software to eateries. However, recent earnings signals and valuation metrics paint a troubling picture for investors. With declining transaction volumes per location, rising operating costs, and macroeconomic headwinds, Toast's premium valuation appears increasingly precarious. This article argues that TOST stock is overvalued relative to peers and that margin pressures in a slowing environment justify a sell recommendation.

Declining GPV Per Location: A Red Flag for Growth Sustainability

Toast's Gross Payment Volume (GPV) per location dropped 3% year-over-year in Q1 2025, signaling a structural slowdown in transaction volumes at its existing merchant base. Management attributed this to macroeconomic factors like stagnant consumer spending and rising dining costs. However, the real concern lies in the persistent nature of this decline: executives warned that the trend would likely continue into Q2 2025.

This metric is critical because GPV growth has historically been the engine for Toast's revenue expansion. With GPV per location weakening, the company must rely solely on new merchant acquisitions to drive top-line growth—a strategy that becomes increasingly costly and unsustainable.

Operating Costs Are Outpacing Revenue Growth

While Toast's adjusted EBITDA margin expanded to 32% in Q1 2025—beating its 30-35% medium-term target—this improvement masks rising cost pressures. Operating expenses (excluding bad debt) surged 12% year-over-year, driven by a 25% jump in sales and marketing (S&M) spending. This reflects aggressive investments to scale sales teams, expand into international markets, and support enterprise clients like Applebee's.

The problem? These investments are yielding diminishing returns. ARR (Annual Recurring Revenue) growth has slowed to 25-27% for 2025, down sharply from 34% in 2024. Meanwhile, S&M costs now account for a larger slice of revenue, squeezing margins. Even worse, tariff-related hardware costs are expected to rise further, adding to expense pressures.

Valuation: A Premium Multiple on Uninspiring Fundamentals

Toast trades at a Price-to-Sales (P/S) ratio of 3.6x–4.17x, far above peers like Block (SQ) (5.5x) and Lightspeed POS (SHOP) (9x). Its EV/EBITDA multiple of 42x next year's adjusted EBITDA is also unreasonable compared to its growth trajectory.

Consider the math:
- ARR Growth: Slowing to low-to-mid-20s from 34% in 2024.
- GPV Headwinds: Existing merchants are transacting less, forcing reliance on costly new acquisitions.
- Margin Risks: Even with current EBITDA margins, rising S&M costs and tariffs threaten future profitability.

Macroeconomic and Competitive Risks

The U.S. restaurant sector is struggling. Dining sales grew just 1.2% in Q1 2025, down from 4.5% in 2024. This weak demand directly impacts Toast's merchants, who may reduce spending on premium SaaS solutions. Meanwhile, competition is heating up: Shopify (SHOP) is expanding into POS with its Shopify POS system, while Square (SQ) continues to dominate the small-business payments space.

Investment Recommendation: Sell TOST

Toast's stock is priced for perfection: its valuation assumes margin stability and reacceleration of GPV growth, neither of which appear likely. With ARR growth slowing, operating costs rising, and GPV per location declining, the risks far outweigh the rewards.

Key Sell Triggers:
1. A further drop in GPV per location below 3% decline.
2. Free cash flow falling short of adjusted EBITDA for the full year.
3. Valuation multiples contracting as peers outperform.

Conclusion

Toast's premium valuation is built on a shaky foundation. Investors are overpaying for a company facing slowing transaction growth, rising costs, and a deteriorating macro backdrop. Until management demonstrates meaningful margin resilience or a turnaround in GPV trends, TOST is a sell.

Disclaimer: This analysis is for informational purposes only and should not be considered financial advice.